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

Christian Winther ()

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

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.

Keywords: Endogenous leadership; product differentiation; product introduction; technological change; word of mouth communication (search for similar items in EconPapers)
JEL-codes: D83 L11 O33 (search for similar items in EconPapers)
Pages: 23
Date: 2008-09-03
New Economics Papers: this item is included in nep-com, nep-cse, nep-mic and nep-mkt
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