Aggregate Impact of Different Brand Development Strategies

Abstract

Current branding literature investigates the spillover effects and extension effects due to the introduction of product extensions. However, no study so far has evaluated the aggregate market impact of these effects across different brand development strategies or accounted for the strategic decision to introduce the extension. It is important to examine the above given the significant investments and the high failure rates associated with the introduction of new product extensions. In this study, we develop an analytical framework that derives revenue outcome due to an extension introduction as a function of spillover and extension effects. We empirically estimate the above effects through a Bayesian endogenous switching model that jointly models market shares of the extension and its parent brand along with the strategic decision to introduce the extension and the endogeneity in prices. By using a data set that covers 155 extensions introduced across 20 U.S. geographic markets, we obtain several new generalizable empirical insights. Our results show that spillover effects are higher for brand extensions, whereas line extensions benefit through larger extension effects. We find that vertically differentiating a line extension in terms of increased quality mitigates its negative spillover effects. The addition of a new brand name (i.e., sub-branding) lowers spillover effects for line extensions, whereas it increases the market performance for brand extensions. Our findings provide several strategic implications for manufacturers to successfully introduce and manage product extensions. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1900 . This paper was accepted by Pradeep Chintagunta, marketing.