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Modeling Brand Extension as a Real Option: How Expectation, Competition and Financial Constraints Drive the Timing of Extensions

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  • Pattikawa, L.H.
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    Abstract

    Despite their strategic importance firm’s motivations to extend brands have received only modest attentions by marketing scholars. We use multiple events duration models to examine the timing of launching brand extensions. We provide a theoretical framework of brand extensions based on the real option framework. Using a real option framework allows us to make a parallel comparison between firms launching brand extensions with an agent exercising a call option in a financial market. Specifically, we consider the timing of extensions as an opportunistic behaviour to cope with uncertainty, competition, and lack of financial resources. By using 428 pharmaceutical brands that were extended in the period 1973-2005, we demonstrate the use of several different variant of Cox models to deal with multiple extensions within the same brand (Andersen-Gill model, Marginal model, and two Conditional models). Our results show that firms launch brand extensions in response to increase in competition pressure, uncertainty concerning their expectation on firms’ stock prices, and lack of financial resources.

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    Bibliographic Info

    Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam in its series ERIM Report Series Research in Management with number ERS-2006-030-STR.

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    Date of creation: 30 Jun 2006
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    Handle: RePEc:ems:eureri:7855

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    Related research

    Keywords: Brand Extension; Hazard Models; Real Options;

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    References

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    1. Quigg, Laura, 1993. " Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-40, June.
    2. Caballero, Ricardo J. & Pindyck, Robert S., 1992. "Uncertainty, investment, and industry evolution," Working papers 3460-92., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Mary W. Sullivan, 1992. "Brand Extensions: When to Use Them," Management Science, INFORMS, vol. 38(6), pages 793-806, June.
    4. A. Steven Holland & Steven H. Ott & Timothy J. Riddiough, 2000. "The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(1), pages 33-64.
    5. Vivek Ghosal & Prakash Loungani, 1995. "Product market competition and the impact of price uncertainty on investment: some evidence from U.S. manufacturing industries," International Finance Discussion Papers 517, Board of Governors of the Federal Reserve System (U.S.).
    6. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    7. Pil Choi, J., 1997. "Brand Extension as Informational Leverage," ISER Discussion Paper 0451, Institute of Social and Economic Research, Osaka University.
    8. Vivek Ghosal & Prakash Loungani, 2000. "The Differential Impact of Uncertainty on Investment in Small and Large Businesses," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 338-343, May.
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