The Impact of External Parties on Brand-Name Capital: The 1982 Tylenol Poisonings and Subsequent Cases
Tylenol poisonings proved brands are quality hostages—J&J's $100M recall enabled recovery from 7% to 30% market share in six months.
Brand names are hostages—and that's the point. Mitchell's economic analysis of the 1982 Tylenol poisonings showed that Johnson & Johnson's stock market losses far exceeded direct costs, providing empirical support for Klein and Leffler's theory that brands function as quality-assuring mechanisms. When seven people died from cyanide-laced capsules, Tylenol's market share cratered from 35% to 7%—even though J&J hadn't caused the poisoning. The brand itself absorbed the damage because it had absorbed the trust.
Recovery required costly signaling at scale. J&J spent $100 million to recall 31 million bottles and pioneered tamper-proof packaging. Within six months, market share recovered to 30%. The economic logic: brands work precisely because they're vulnerable. Like organisms that invest heavily in elaborate displays, companies that build expensive reputations have something substantial to lose—and that vulnerability is what makes their quality claims credible.
Key Findings from Mitchell (1989)
- Stock market losses to J&J far exceeded direct costs—the brand absorbed trust damage beyond the poisoning event
- Market share collapsed from 35% to 7% despite J&J's clear non-involvement in the tampering
- $100 million recall and tamper-proof packaging redesign enabled recovery to 30% market share within six months
- Provides empirical support for Klein-Leffler theory of brand names as quality-assuring mechanisms
- Only the 1982 and 1986 Tylenol poisonings showed significant stock losses—lower-brand products weren't similarly vulnerable