DP17261 An ugly face, really? A theoretical investigation into the causes of brand dilution

Author(s): Emanuele Bacchiega, Mariachiara Colucci, Vincenzo Denicolò, Marco Magnani
Publication Date: April 2022
Keyword(s): Brand Dilution, Brand Licensing, Double-sided Moral Hazard, Reciprocal Effect
JEL(s):
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17261

This paper questions common wisdom about two ideas: first, that brand dilution is the unintended consequence of a poorly executed extension strategy and, second, that brand licensing â?? a widely used means to extend a brand that drives revenues for brand owners - increases the likelihood of brand dilution. Motivated by rich yet fragmented empirical literature, we propose a comprehensive theoretical model of brand extension that encompasses the critical factors which determine the attractiveness and development of brand extension. This allows us to suggest that brand dilution is a viable opportunity to monetize the brand and not necessarily a liability to be avoided. Managers should then consider the brand as an asset on which to invest and, possibly, divest to increase the company's cash inflows. We also confute the causal relationship from licensing to brand dilution. For the products that make the brand owner indifferent between internal and licensed development, switching to licensing always increases the quality of the extension. The model offers a novel perspective on important managerial choices and delivers hypotheses amenable to empirical testing.