Brand extension and channel structure: An analysis of the effects of social influence

We observe in practice that manufacturers of conspicuous or luxury goods extend their major brands to the low-end market with different channel structures. The brand extension will cause social influence between the parent and sub brands. On one hand, the high-end consumers are less willing to buy the parent brand due to the sub brand sales to the low-end market. On the other hand, the low-end consumers may find the sub brand more attractive with parent brand sales to the high-end market. In this paper, we build a game-theoretical model to study the impacts of social influence on a luxury good manufacturer, which sells the parent brand through a retailer and has the option of extending to a sub brand under different channel structures. Specifically, we study the following three brand extension structures: brand extension with the same retailer, with different retailers, and with direct selling. We study and compare the equilibrium decisions and profits across different structures, and find that social influence and channel structure have significant impacts on the brand extension decisions and profits. For example, as the positive influence of the parent brand on the sub brand’s sales increases, the manufacturer’s and retailer’s equilibrium profits may decrease under brand extension. Compared to the benchmark of no sub brand, both the manufacturer and retailer get higher profits under brand extension with the same retailer. Under the other two extension structures, however, the manufacturer’s and retailer’s profits may be lower. Interestingly, the retailer’s profit from selling both the parent and sub brands may be even lower than that of selling the parent brand only.