Brand Extension as Informational Leverage

The marketing literature refers to the concept of brand capital and provides empirical evidence that firms with a large stock of well-established brands have an advantage in introducing new products. This paper develops a theory of brand extension as a mechanism for informational leverage in which a...

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Bibliographic Details
Published in:The Review of economic studies 1998-10, Vol.65 (4), p.655-669
Main Author: Choi, Jay Pil
Format: Article
Language:English
Subjects:
Brands
Capital costs
Consumer economics
Consumer equilibrium
Consumer prices
Financial leverage
Marketing
Monopoly
Price distortions
Production costs
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Summary:The marketing literature refers to the concept of brand capital and provides empirical evidence that firms with a large stock of well-established brands have an advantage in introducing new products. This paper develops a theory of brand extension as a mechanism for informational leverage in which a firm leverages off a good's reputation in one market to alleviate the problem of informational asymmetry encountered in other markets. It is shown that brand extension helps a multi-product monopolist introduce a new experience good with less price distortion. Thus, the paper provides a theoretical foundation for the concept of brand capital.
ISSN:0034-6527
1467-937X
DOI:10.1111/1467-937X.00063