IDEAS home Printed from https://ideas.repec.org/p/ems/eureri/7855.html
   My bibliography  Save this paper

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

Author

Listed:
  • Pattikawa, L.H.

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.

Suggested Citation

  • Pattikawa, L.H., 2006. "Modeling Brand Extension as a Real Option: How Expectation, Competition and Financial Constraints Drive the Timing of Extensions," ERIM Report Series Research in Management ERS-2006-030-STR, 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.
  • Handle: RePEc:ems:eureri:7855
    as

    Download full text from publisher

    File URL: https://repub.eur.nl/pub/7855/ERS-2006-030-STR.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Ghosal, Vivek & Loungani, Prakash, 1996. "Product Market Competition and the Impact of Price Uncertainty on Investment: Some Evidence from US Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 217-228, June.
    2. 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.
    3. Jay Pil Choi, 1998. "Brand Extension as Informational Leverage," Review of Economic Studies, Oxford University Press, vol. 65(4), pages 655-669.
    4. Mary W. Sullivan, 1992. "Brand Extensions: When to Use Them," Management Science, INFORMS, vol. 38(6), pages 793-806, June.
    5. Quigg, Laura, 1993. " Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-640, June.
    6. Caballero, Ricardo J & Pindyck, Robert S, 1996. "Uncertainty, Investment, and Industry Evolution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 641-662, August.
    7. 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.
    8. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Brand Extension; Hazard Models; Real Options;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ems:eureri:7855. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RePub). General contact details of provider: http://edirc.repec.org/data/erimanl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.