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Brand popularity, endogenous leadership, and product introduction in industries with word of mouth communication

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  • Christian Dahl Winther

    ()
    (School of Economics and Management, University of Aarhus, Denmark)

Abstract

This paper considers the impact of popularity on duopolists’ entry strategies into an emerging industry, where each consumer holds a preference for one of two competing brands. Brand popularity is influenced by word of mouth communication, as early adopters recommend the brand they have bought to later buyers. Early introduction is, however, a costly strategy. The timing of product introduction is therefore of strategic importance to firms. I investigate the equilibria of the game when firms choose their time to market strategies sequentially, and observe how they relate to the popularity of the Stackelberg leader’s brand. This analysis reveals firms’ individual incentives for leader and follower roles, and the market structure that would result in this noncooperative game. As von Stackelberg showed a leader’s commitment to a strategy can preempt the follower. The present model shows that this situation, where both firms prefer the leader role, most likely occurs when brands hold equal levels of popularity. On the other hand it is interesting to observe that in certain markets, in particular where popularity is highly asymmetric, it is optimal for the dominant firm to become follower, and for the inferior firm to lead, because this facilitates soft competition. Still, the market structure may be insensitive to the order of moves. This warrants investigation of the connection between leadership and brand popularity, and the effect on market structure.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2008-11.

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Length: 23
Date of creation: 03 Sep 2008
Date of revision:
Handle: RePEc:aah:aarhec:2008-11

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Endogenous leadership; product differentiation; product introduction; technological change; word of mouth communication;

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  1. Cabral, Luis M. B., 2002. "Increasing Dominance with No Efficiency Effect," Journal of Economic Theory, Elsevier, vol. 102(2), pages 471-479, February.
  2. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  3. Damme, E.E.C. van & Hurkens, S., 2004. "Endogenous price leadership," Open Access publications from Tilburg University urn:nbn:nl:ui:12-129320, Tilburg University.
  4. Fudenberg, Drew & Ellison, Glenn, 1995. "Word-of-Mouth Communication and Social Learning," Scholarly Articles 3196300, Harvard University Department of Economics.
  5. Damme, E.E.C. van & Hurkens, J.P.M., 1996. "Endogenous Stackelberg Leadership," Discussion Paper 1996-115, Tilburg University, Center for Economic Research.
  6. AMIR, Rabah & STEPANOVA, Anna, 2004. "Second-mover advantage and price leadership in Bertrand duopoly," CORE Discussion Papers 2004037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Steffen Huck & Wieland Müller & Hans-Theo Normann, 1999. "To commit or not to commit: Endogenous timing in experimental duopoly markets," Experimental 9906002, EconWPA.
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