SPILLOVER EFFECTS, COST SAVINGS, RESEARCH-AND-DEVELOPMENT AND THE USE OF BRAND EXTENSIONS

Introducing a new product as a brand extension can both lower the cost of introduction and create a spillover effect that depends on its realized quality level. We show that these two facts along with a model of R&D in the presence of marketing uncertainty, explain the empirical observation that firms introduce brand extensions later than new-name products. Our theory also explains the otherwise puzzling empirical observation that brand extensions that enter early in the product life cycle succeed less often than do early entering new-name products.