## The Intended-Unintended Debacle: Audi’s early 90s PR crisis analyzed in Network Effects

In 1984, German car manufacturer was on the rise in the U.S. soil: Audi sales had shot up 48 percent on the strength of their new aerodynamic 5000, the latest hot weapon in the perpetually-escalating suburban driveway status war. However, lesser expected was the fact that Audi would withdraw from North American market from a PR debacle. Today the debacle will be analyzed in a network effects point of view.

Incidents were reported where suburban moms’ in their brand-new Audi 5000s would mow down their little kids and pinching the kids’ grandmas at the far garage wall, and Audi 5000’s pedal design were blamed. In 1989, NHTSA (National Highway Traffic Safety Administration) issued its report, fully exonerating Audi 5000 from claimed flawed design; however, that didn’t stop consumers from flooding Audi with lawsuits, let alone the tsunami of negative publicity associated with them. As a result, Audi sales collapsed, from 74k units in 1984 to 12k by 1991.

To begin modeling the fall of Audi, we assume that for all potential buyers, each one of them has a reservation price for Audi 5000, where reservation price is negatively proportional to market share, x. Furthermore, the willingness to purchase is also tied to the number of buyers. Supposedly, Nancy’s neighbor Ellie just had her newest European sleek sedan delivered to her door, and as more of the Ellies were switching to the new Audi, Nancy would also be tempted to make the switch. To model this behavior, a linear relationship to proportion of buyers is used. In the end, the market is defined to be at equilibrium where the purchase price is equal to the MSRP of the product. To sum up everything mathematically, r(x) = 10,000*(1-x), f(z) = 20z, and the final price is P = r(x)*f(z).

Consider the case where the Audi 5000 is retailed at $20,000 USD. In order to solve for equilibrium we have: 10,000(1-x)*20x = 20,000, solved to find x = 11.3% or 88.7%. However, from similar models presented in class and in textbook, we know that at x = 88.7% is the stable equilibrium, and at x= 11.3% is the unstable equilibrium. As bad publicity accumulated, less people opted to purchase Audi, and market share would drop. Had Audi taken measures to prevent sales from dropping, such as reducing price, eventually the market share would bounce back to the new stable equilibrium near 88.7%. Unfortunately, the market share dropped further below 11.3%, and Audi would never be able to recoup the loss. Therefore, Audi quitted the U.S. market, with Network Effects being a foremost reason.