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The viability of a second-mover'smarket win with higher brand equitySeongsu Kim aa Fisher College of Business, The Ohio State University , Columbus,Ohio , USAPublished online: 05 Apr 2013.
To cite this article: Seongsu Kim (2013) The viability of a second-mover's market win with higherbrand equity, Journal of Strategic Marketing, 21:3, 201-216, DOI: 10.1080/0965254X.2013.768691
To link to this article: http://dx.doi.org/10.1080/0965254X.2013.768691
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The viability of a second-mover’s market win with higher brand equity
Seongsu Kim*
Fisher College of Business, The Ohio State University, Columbus, Ohio, USA
(Received 18 December 2012; final version received 17 January 2013)
This study supports the fact that in some aspects bounded rationality in consumerbehaviors drive consumers to value more intangible than tangible aspects in a product,and enable the second-mover to overtake the market. The model of this paper focuseson the impact of a sequential market entrance of two firms in one market segment. Bymeans of the Stackelberg competition and empirical metrics used in brandmanagement, the model tries to show that when customers are facing an entrance ofa product with a higher valued brand, they can ignore the first-mover’s superiority andmove to the product which delivers a stronger value – which is in this study’s casegreater brand equity (trust to a brand due to the brand’s reputation and the value thatthis equity delivers). The findings show viable applications in the current smart phonemarket where customers’ belief based on bounded rational trust and belief in a brand’sequity can make the late-mover overcome the disadvantages of being the inexperiencedcompetitor. Also, in the same context, when consumers do not have a high discrepancyin choosing a product by its technological background or market experience, intangibleassets can serve as the decision variable of a product.
Keywords: brand equity; brand extension; first-mover; second-mover; Stackelbergcompetition
1. Introduction
Brand extension and competition between brands is not a special issue in today’s market
competition. A part of this brand extension is the entrance sequence into the market. The
product that enters a new market by an extended brand has the halo of the parent brand that
the company holds for protection. But what if the market that this new product will enter
already has another brand with higher technology, better know-how and information? The
new enterer that has nothing but the halo of the parent brand has then to lower its price to
make some place in the market - which is usually the case - or just enter relying on the
brand equity of its parent brand.
Recent smart phone competition between Apple and Samsung shows a phase of this
competition. In the real world sometimes stronger brand equity can overcome the
technological gap. Of course, there could be some external factors that make this gap
smaller like which telecom company provides IphoneTM and which the GalaxyTM, or the
lifestyle of different people. However, considering the situation of the American cell
phone market where almost every cell phone of the same category (e.g. smart phone) is
competing in an almost equal situation, the success of brand over technology can easily be
observed. Technology, or in other words, the technique that enables the features of a
product, sometimes is not the most important decision variable when overwhelming brand
q 2013 Taylor & Francis
*Email: [email protected]
Journal of Strategic Marketing, 2013
Vol. 21, No. 3, 201–216, http://dx.doi.org/10.1080/0965254X.2013.768691
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equity is valued higher by the customer. When this is true, the same situation with
IphoneTM is also possible whenWindowsTM enters the same smart phone market (Hempel,
2009).
This study is based on the fact that brand equity evoked by superior brand equity in a
Stackelberg competition can offset the disadvantage of being the late-mover. Considering
that brand extension could also be a late-mover movement, Stackelberg competition and
brand extension theory can be connected in certain situations. Contrary to the Marketing
literature, Economics literature mostly warns that the first-mover has a preemptive
advantage that makes it the market leader. Marketing literature, instead, has a positive
view on brand extension (implying late-mover movement): it considers brand extension
to strengthen the brand and lead the competition giving a positive result. Still unsolved
which opinion fits more into the reality, this study sets up a model where the late-mover
moves into the first-mover’s market while having stronger brand equity than the first-
mover. Using analytical proofing methods, the expected result is to get a condition in
which the late-mover with stronger brand wins the market leadership over the first-
mover.
2. Literature review
In the last two decades, empirical studies in marketing have been announcing that the
first-mover substantially has a competitive advantage over the late-mover and is likely to
be the market leader in the same product category (Robinson & Fornell, 1985; Urban,
Carter, Gaskin, and Mucha, 1986). Schmalensee (1982) was the first to show that the first-
mover with a pioneering brand can attain a greater market share than the follower. The
reason for this is because consumers may have uncertainty about the quality of the new
product or are unwilling to incur the costs of experiencing something new (Nelson, 1974).
But this does not hold in a market where products are quite similar in technology.
Because many of today’s products are built to be user-friendly and among similar
competitors, products are not differentiated in many ways so that these days customers do
not worry about the transferring cost incurred by change of brand or product (Hatvany &
Stone, 1987). Because of similar product features and technology, customers are now
smart enough to manage different types of systems than before. Under this condition,
what can then be the decision variables that customers use by choosing a product?
Basically, customers choose a product based on a combination of product features,
marketing mix (or control variables). Product feature incorporates brand name and the
technology for developing a product and quality that ensures this technology to the
customers. Marketing mix is a variable that influences customers to purchase a product
(Carpenter & Lehmann, 1985). Among marketing mixes, advertising is a strong element
that has a considerable effect on customers’ decision making (Martı́nez, Montaner, and
Pina, 2009). (All elements mentioned above are incorporated in this study, though
somewhat different.) Unlike the model used in Carpenter and Lehmann’s (1985) work,
the proposed model in this study separates brand from the product feature variable and
adds it to the marketing variable (or control variable) based on the recent empirical
findings of advertisement and brand research that brand is not a static concept innate in a
product but a value that can be changed by several marketing mixes or promotions (see
Martı́nez et al., 2009). Thus, brand, as a moving concept of a product, is more alterative
than the technical function or feature of a product so that it would be more suitable to put
it into the marketing mix variable. Further, transferring brand from product feature
variable to marketing mix variable does not harm the entire model because product
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feature (or technology), and marketing mix (or brand equity) are all incorporated in both
first- and late-movers’ demand function so that nothing of Carpenter and Lehmann’s
(1985) proposition is lost.
A review on brand equity literature shows that, at a conceptual level, some agreement
exists as to what is meant by brand equity (Park & Srinivasan, 1994). Here, we follow the
definition given by Farquhar (1989) that brand equity is the added value endowed by the
brand to the product. Several authors have given definitions about brand equity, mostly
consistent with Farquhar’s definition (e.g. Aaker, 1991; Kamakura and Russel, 1989;
Keller, 1993; Leuthesser, 1988; Simon and Sullivan, 1993; Srinivasan, 1979; Srivasta and
Shocker, 1991). Unlike the conceptual definition of brand equity, in brand equity
measurement, there is not much of consensus. According to previous literature, there have
been several methods used to measure brand equity (e.g. Kamakura and Russel, 1989;
Srinivasan, 1979; Swait, Tulim, Jordan, & Chris, 1993). Here, the method used in
Carpenter and Lehmann’s (1985) work is adopted which defines customers’ utility by
product feature and marketing mix. The reason for using this is because the models of
Kamakura and Russel (1993), Srinivasan (1979), Kamakura and Russel (1993), and Swait
and colleagues (1993) do not divide the estimated equity into its components that could
change one’s brand equity. To be precise, like in Kamakura and Russel’s (1993) work,
external effects such as advertising, promotions, consumer reports and word-of-mouth
effects are not integrated into the model. Approaches like this can be used to gain the pure
value of a brand but not the relative value interacting with external factors. Additionally,
Carpenter & Lehmann (1985) are focusing on the attribute (feature) of a product which is
almost not considered in the models by the authors mentioned above. Because of these
aspects, this study’s model is reflecting much of Carpenter and Lehmann’s (1985) model
like that in Park and Srinivasan’s (1994) study.
Another approach that has been done over several decades is the Resourced-Based
View (RBV) in the Strategic Management area. Wernerfelt (1984) tried to explain that
competitive advantage comes from resources that a firm develops or acquires to
implement product market strategy. In other words, competition among product market
positions held by firms can thus also be understood as competition among resource
positions held by firms. Mostly the factors enabling a superior position in the market were
considered to be simple price or cost vectors in various forms of optimization problems
used in the Industrial Organization literature. Contrary to the Economics literature,
Strategic Management assumed a more sophisticated view of factors that leads a firm to a
superior market position. One of the most prevalent, and most used concepts is Barney’s
(1986) ‘Strategic Factor Market’. A Strategic Factor Market is defined as a market ruled by
resources that enable a firm to preempt the market position. This is somewhat
differentiated from Porter’s (1980) theory that industry and products enable a firm to
acquire a competitive position in the market because the Strategic Factor Market refers to
the ability of a firm – and not the product – that ‘performance’ and not ‘structure’ is the
crucial factor of a market win (see ‘structure-conduct-performance’ (SCP) in Bain, 1956).
From this perspective, the RBV has presented an excessive amount of literature that has
been used to explain superior performance of a firm toward its competitors. The
fundamental logic of the RBV is based on the assumption that resources can deliver a
competitive advantage against one’s competitors. This view is literally revolutionary in
the sense that it brought the Economics’ view of a firm’s superior rent in the context of the
industry to the perspective that firm capabilities and resources bring about a win in
competition. Here, resources are tangible and intangible assets firms use to conceive of and
implement their strategies (Wernerfelt, 1984; Rumelt, 1984; Barney, 1991; 2001). These
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resources include both intangible assets such as brand equity as well as tangible ones such
as production facilities.
The first study that highlighted brand as a competitive resource was Itami (1987:12)
who described intangible assets as invisible assets. For Itami (1987:12) invisible assets are
information-based resources such as technology, customer trust, brand image and control
of distribution, corporate culture and management skills. Here, invisible, or in other words,
intangible assets are real sources of competitive power and adaptability because they are
hard and time-consuming to accumulate, can be used in multiple ways simultaneously and
are both inputs and outputs of business activities. Other than Itami’s focus on brand, other
scholars also emphasized the value of intangible assets. On top of Wernerfelt (1984) and
Barney (1991), Prahalad and Hamel (1990) put weight on intangible assets as bases of
competitive advantage in choosing and implementing corporate strategy. Also, Stalk,
Evans, and Shulman (1992) added capabilities as intangible assets, while Teece, Pisano,
and Shuen (1997) emphasized the ability to develop capabilities and referred to the term
‘dynamic capabilities’.
The logic of introducing a superior intangible asset that promises superior market
position is not a very new logic (Finney, Lueg, & Campbell, 2008). In the aforementioned
market called Strategic Factor Market (Barney, 1986), an economic rent only can be
obtained by either luck or managerial insights (Demsetz, 1973). In a ‘perfect’ Strategic
Factor Market all market information is revealed by everyone so that price of products is a
direct reflection of the market information. In this sort of market, all possible actions are
predictable so that a resource-based development, and from there obtained economic rents
cannot exist. This is why Demsetz (1973) refers to the causal factor of market win as
merely luck or managers’ insight of capturing undervalued and overvalued products in the
market. Contrary to a perfect one, the imperfect factor market refers to resource
development as an important reason for market win. Here, Barney (1986) suggests that in a
market where resources are crucial factors, a firm should acquire resources external to the
firm to obtain economic rents. This is because resources that the firm already controls are
already extant in the market and have their price and value positions, while new resources
are not anticipated in the incumbent factor market so that it can be the source of economic
rent. Here, based on this notion, we can say that factors that are introduced from outside
the market, superior to the incumbent factor market have enough reason to be the basis of
superior market position.
Contrary to the deep research in the Strategic Management area, Industrial
Organization literature has done (comparatively) little on intangible assets as overturning
factors of market dominance. Many of the previous studies covering first-mover and late-
mover movements and Stackelberg competition do not consider brand equity as a critical
decision factor of the customer. Many of them consider technology and information
advantage at the first place (Rhee, 2006; Amir & Stepanova, 2006): brand extension has
not been questioned to be critical in a Stackelberg first-mover, second-mover competition.
Most of the Economics studies are saying that first-movers have a certain advantage of
preempting the market. In defining first-mover advantage, the Marketing literature is
almost consistent with the Economics literature. Namely, in the fact that first-mover
advantage is the ability of a firm to earn above its competitors’ profits, by entering a
market first and entering the market in a way that thwarts other firms’ attempts to compete
in that market (Lieberman & Montgomery, 1988, 1998). But, contrary to this perspective,
many of the recent marketing studies also are saying that brand extension can have a
positive effect on the brand and product when the extended brand and product have a good
fit; also when well perceived by customers and quality is adequate (Dacin & Smith, 1994).
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Considering that brand extension could also be a second-mover action, when the extended
brand moves into the market as a late-mover one question remains unsolved – whether
brand extension and strong brand equity let the late-mover win the market or let the first-
mover win who has a preemptive advantage for having been in business longer than the
late-mover.
Giving some insights into the previous literature dealing with Stackelberg competition,
Gal-Or (1987) proposes that the late-mover has an advantage in information. Setting a
model where the first-mover grants free access to its market knowledge (information), the
late-mover can profit from this information. In other words, the late-mover does not have
to make the same mistakes that the first-mover had to go through. Baumol (1982) also says
that the late-mover has an advantage but under a different condition. He says that the late-
mover gains advantage when it undercuts its own price. Also, Reinganum (1983) says that
the late-mover has an advantage but when it invests more than the leader so that
consequently, the late-mover collects a patent in research and development, it is possible
to overcome the time lag after the first-mover’s move. Other than these studies, basically
most of the previous literature states that the first-mover still has an advantage by
experiencing the market before the late-mover. For example, Schmalensee (1982) shows
that imperfect information on the part of the consumer leads to first-mover advantages: if
consumers are satisfied with the first brand then they are unwilling to change their products
by an uncertain follower’s brand. Other than first-mover advantages incurred by
consumers’ decision making, previous literature also finds that certain actions of the first-
mover can bring market dominance when first-movers protect themselves by setting up
barriers and developing brand-specific user skills to influence consumers’ evaluation of
products (Stigler & Becker, 1977). Barriers are such things as higher technology (learning
curve effects and advantages based on R&D), preemption of assets and switching cost
(Lieberman & Montgomery, 1988, 1998).
Brand extension, or the use of an existing brand name to enter a new product category,
is a popular branding strategy (Swaminathan, 2003). There are two contradicting opinions
that say whether brand extension has a positive result on the parent brand or not (Aaker,
1991; Dacin & Smith, 1994). One perspective is that overextending a brand might dilute
the meaning of the core brand and weaken its association to the parent brand (Aaker,
1991). The other is that multiple brand extensions actually help build brand equity (Dacin
& Smith, 1994). In spite of these different positions toward brand extension, both
perspectives have in common that brand extension has a certain effect on the parent brand
which, in turn, can be interpreted that the parent brand also has an effect on the extended
brand so that this reciprocal effect is possible (see Keller & Aaker, 1992; Loken &
Roedder John, 1993). In this realm, this study premises that the parent brand would have a
positive effect on the extended brand, regardless of the result of this extension that it
ultimately would positively or negatively influence the parent brand.
Dacin & Smith (1994) say that brand strength in brand extension has two feasible
aspects in association with the parent brand. One is the favorability of associations and the
other is the abstractness of brand associations. The former can also be expressed as the
relatedness of product quality to the brand and the latter product category to the brand
(Simon and Sullivan, 1979). Both terms are incorporated in this study, though separately
used in technology (quality and product feature) and brand (product category and brand
favorability). Because this study is looking for separate effects of technology and brand
influence in customer product choice, in the model, these two concepts cannot be used
together though separated into different variables. This study considers that the late-mover
fulfills at least the standard quality and product feature in product technology. Still not the
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critical decision variable of the brand favored customer (late-mover), it has a stronger
influence on the first-mover’s brand which leads customers to remain in the first-mover’s
market or additional new customers who are considering buying a new product in this
product category. Also, product category fit is considered to be greater for the first-mover
but due to fanatic preference to the late-mover’s brand, or in other words, the parent brand,
this discrepancy is supposed to be offset by the second-mover. Consequently, the late-
mover’s brand equity acts as a buffer zone which offsets the superiority of the first one.
Thinking that an extended brand is entering a new product market in the realm of the
parent brand, it has not been considered what kind of effect it will have in a market
competition among brand equities when the extended brand is a late-mover. In other
words, brand extension has not been considered as a second-mover action in a Stackelberg
competition. Contrary to the Marketing literature, the Economics literature had
investigated a whole lot of Stackelberg competitions in relation to market information
and technology but still not much on brand equity and brand extension. The Marketing
literature, in turn, has considered much of brand extension (including sequential brand
extension but still in the context of the influence of the extended brand on the parent brand;
Swaminathan, 2003) but not in a sequential market entrance.
This fact has led this study to research the late-mover’s win through higher brand
equity in the following sequence. First, the empirical tool to measure brand and customer
move due to preference on higher brand equity will be introduced. Thereafter, some
insights of a situation will be given as to how an extended brand that has stronger brand
equity than the current competitor can occupy the market. The third thing dealt with in this
study is the result under which conditions the late-mover will have market superiority with
its stronger brand equity introduced by its parent brand. Finally, there will be given some
propositions to further research related to the brand, technology choice of the customer.
3. The model
In the classical Cournot competition, the first-mover is the Stackelberg leader. But this is a
competition under a perfect market competition with products with identical price, feature
and perfect market information. In the Bertrand competition, the late-mover earns more
profit under the same condition as the Cournot competition. But unrealistic results from
those classical competitions can be muted when firms have differentiated products
(Gardner, 1995). While in a Bertrand competition with differentiated products, the late
mover with lower price wins the competition. However, in the model of this study, it is not
proposed that the second-mover lowers its price because this study wants to see how direct
competition led by other factors like brand and technology can make a difference. In short,
the model does not consider a price competition but rather quantity competition is
considered. Since both prices of firms 1 and 2 are the same, more quantity, or in other
words, more market share can bring about success in the competition by a greater profit.
The model in this study consists of two firms competing in one product category. Firm
1 is the firm that already has a market share while firm 2 is trying to get into the market,
currently dominated by firm 1. The scenario of this Stackelberg competition is simple.
Firms 1 and 2 are selling products of the same product category and there is no restriction
whether the product is a service product or merchandise. Here, firm 1 is called the first-
mover and firm 2 the second-mover named after the sequential entrance of the market. The
crucial element in this competition is that firm 1 is currently the market pioneer that is
having the most shares in the market. But firm 2, as the very comparable competitor to firm
1, has stronger brand equity than firm 1. When firm 2 – the firm with the greater brand
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equity – enters, the competition begins. Considering that firm 2 has higher brand equity
than firm 1, it is possible that people already using firm 1’s product, are moving to firm 2’s
product due to greater utility evaluation to brand. Also, people who still have not decided
which product to use, have a high possibility to use firm 2’s product, because higher brand
equity reassures customers that it is a reliable product (Cox, 1967; Tauber, 1981). Contrary
to the superior brand equity that firm 2 has, firm 1 has higher technology to produce
advanced product features that enables it to tie in customers with technology preference.
So, customers are in the position to choose one of those two products; the one with more
features (technology) or the one with higher brand equity. In both situations customers are
sure that they have bought the right product for themselves (Nowlis & Simonson, 1996;
Cox, 1967; Tauber, 1981). This is because customers who favor more technology are
satisfied by the technological superiority that firm 1 has and customers who favor more the
brand are satisfied by the quality or just the reputational value that the brand delivers. In
both cases customers are expecting some kind of satisfaction coming from the product
technology or brand but expectation just exists before the actual purchase. Here, we do not
consider consumer reports or word-of-mouth that can change one’s attitude toward the
product. We just consider the pure standard of a product that a consumer has when
purchasing a product.
Favorability of customers is expressed in utility functions and the model supposes that
if firm 2 enters the market, customers who are currently using firm 1’s product but prefer
firm 2’s brand are moving to be firm 2’s customer. But people who still want to stay in firm
1’s market may stay. The same counts for firm 2 when people supposed to use firm 2’s
product are moving to firm 1 after firm 2 enters the market. Further, this game does not
expect that the first-mover makes strategic changes like extreme hostile marketing or price
lowering actions. This model just considers that firm 1 sees firm 2 entering the market and
leaves the decision of product choice to the customer. This kind of situation can be
interpreted as a situation where firm 1 does not fear the threat that firm 2’s superior brand
equity has. The following are the demand curves of both firms: equation (1) is the demand
curve of firm 1 and (2) is the demand curve of firm 2.
P ¼ ðD̂2 q1Þ þ mi1Qþ ð12 mb
2QÞ þ ðx1 2x1 þ x2
2Þq1 ð1Þ
P ¼ ðD̂2 q1Þ2 q2 þ ð12 mt1QÞ þ mb
2Q2 ðx1 þ x2
22 x2Þq2 ð2Þ
Q is the total quantity in the market and is the sum of q1 and q2 (q1 þq2 ¼ Q): q1 is the
quantity of customers that use firm 1’s product and q2 that of firm 2. Quantity is equal to
the number of customers and each customer can purchase just one of the two products:
firm 1’s or firm 2’s. This means that each customer has the alternative choice to buy a
product with more features (more technology) or higher brand equity. So, when a certain
amount of q1 is moving to firm 2’s product, it means at the same time that this amount of
customers are also moving. This is because this study notes that each customer purchases
just one product so that a move of q1 and q2 to q2 and q1 in product quantity also means a
move among customers. While moving among both firms’ product is allowed, the total
quantity and the increase of q2 through the move of certain amount of q1 does not affect the
total amount of customers, or in other words, products in the market. This means that the
total amount of both products and customers is the same and while move between two
sections is possible. Brand is denoted as b and firm 1 has a brand named as ‘1’ and firm 2,
‘2’. It is premised that brand equity of brand ‘2’ of firm 2 is greater than firm 1’s brand ‘1’
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and brand ‘2’ is a brand extended product which is under a positive effect of the parent
brand. While still controversies can exist due to product fit or quality of brand, this study
premises that ‘2’’s brand equity is higher than ‘1’’s whatever factors by evaluation a brand
may get in. Further, the term customer and consumer is used regardless of its theoretical
definition, just phraseology is considered by using these terms. Since equations of both
Economics and Marketing are incorporated, this study does not consider the conceptual
difference coming from those two different sections. Notations of equation (1) and (2) are
summarized in the Table 1.
The term mb2Q denotes the market share that firm 2 gains from the transfer of q1s due to
preference in greater brand equity. This denotation is frequently used in the Marketing
literature and is interpreted in equation (3) and (4) (Carpenter & Lehmann, 1985; Park &
Srinivasan, 1994).
mb2 ¼
Pr 21q1
Qð3Þ
Where Pr21 is
Pr 21 ¼ev
b21
evt12
¼ evb212vt
12 ð4Þ
Since the transfer of the q1s can be expressed as mb2Q, adding it into firm 2’s demand curve
means that a certain amount of q1s have decided to purchase firm 2’s product with a greater
brand equity. While q2 consists of the amount of customers that already have decided to
purchase firm 2’s product and customers who have changed their mind to move to firm 1
due to technology preference. The latter group is expressed as mt1.
In the equation above, vb21 is the utility that customers in the market have on the brand
extended product of firm 2, in which marketing mix such as advertising is also considered.
vb21 can be expressed as follows:
vb21 ¼Xk[C
ða2kX21Þ þ tZ ð5Þ
Notations of this equation are in the Table 2.
Equation (5) actually comes from Carpenter and Lehmann’s (1985) model. It is not
exactly the same however because in this study’s model, the product feature variable is
separated from the utility function and built up as a separated utility function that just
considers the technological effects on the customers. In cases measuring the conjoint
Table 1 Summary of notations (1).
Notation Definition
D Demand interceptq1 Quantity of firm 1’s product with brand ‘1’q2 Quantity of firm 2’s product with brand ‘2’
mt1
Market share of firm 1’s product due to technology
mb2
Market share of firm 2’s product due to brand equityx1 Market information that firm 1 hasx2 Market information that firm 2 has
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utility of a product with brand and product feature (technology), Carpenter and Lehmann’s
model could be useful but in the case like this study where customer values should be
separately measured to compare the different effects that brand and technology have on
customer choice, separation of brand and technology is considered more reasonable.
The separation goes into two elements where customers having different utilities based on
favorability can move to one of the two firms’ products. Further, contrary to Carpenter and
Lehmann’s model where brand extension is not considered, to express the heritage of
brand equity from the parent brand in brand equity of firm 2, tZ is brought into the utility
equation to elevate the output of brand utility. Here, t expresses the relatedness of the
parent brand or brand ‘2’ and Z is the value that customers give (place) to the parent brand
and is supposed to be positive. So, customers buying firm 2’s products have positive
connotations of the parent brand so that this effect has a positive influence on the utility of
brand ‘2’. This fact is based on previous literature saying customer evaluations of brand
extension is positively related to the parent brand when the extension category has a proper
fit (Aaker & Keller, 1990; Boush & Loken, 1991; The Minnesota Consumer Behavior
Seminar, 1987; Park, Milberg, and Lawson, 1991). So, when t is positive, then Z is also
supposed to be positive. This fact leads to another premise that the product brand ‘2’ is
properly fitting with the parent brand. Even though this fit is not as tight as that of brand
‘1’’s product, ‘2’’s brand equity is still greater due to fanatic brand preference of many
customers who greatly value the parent brand.
In equation (4), transfer between customers due to preference of brand to technology is
expressed in a conditional switching probability. Also adopted from Carpenter and
Lehmann’s model (also this time, not exactly the same), it provides a dynamic process
which shows the transferring procedure of customers of technology to brand. Together
with q1 in equation (3), market share is formed. The use of exponential values in (4) is to
pursue extreme values and since all variables in (5) are independent, the use of exponential
values is considered not a problem.
The utility function of customers who prefer the technical features of firm 1’s product
can be expressed as follows:
vt12 ¼Xl[F
ðb1lY12Þ2WF ð6Þ
Notations of equation (6) are in Table 3.
Equation (6) is somewhat different from the former equation of brand equity (5). It is
also totally different from the equation used in Carpenter and Lehmann’s work. This study
developed a concept which connected the average usage rate with the relative value of
technology: ,1 . to ,2 . . Technology is a synonym for ‘feature in the product’ or
Table 2. Summary of notations (2).
Notation Definition
vb21Utility of firm 2’s brand ‘2’ to firm 1’s brand ‘1’
X21 Value of alternative brand ‘2’ to brand ‘1’a2k Preference weight of brand ‘2’ coming from marketing strategy kC Total set of marketing strategies (e.g. advertising)t Coefficient of brand to product categoryZ Value of parent brand
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‘technology that enables this feature’. Thus, when more features are loaded within the
product, the more technology the firm possesses (we also use the word technological
feature which has the same definition as technology or product feature). Through equation
(6), this study gives an insight into the frequently used features in a product. This means,
frequently used features (technology) are of higher utility for those looking for that
particular product feature mix in a product (Nowlis and Simonson, 1996). W is the lowest
acceptable qualitative and technological standard of the product. So, utility of technology
is formed from the technological usage in various technological product feature sets that
are above the required standard least required in a customer’s high technology (features)
preference.
Equation (6) can then be used to get the market share of customers who prefer more
technology to brand. The given equation of the market share is as follows:
mt1 ¼
Pr 12q2
Qð7Þ
Here again, the probability function is given as
Pr 12 ¼ev
t12
evb21
¼ evt122vb
21 ð8Þ
Equation (8), like equation (4), presents the transferring process of the customers. The
difference is that in equation (8), customers have a higher preference for the technology of
firm 1 than the brand of firm 2. Together, this forms the market share where customers of
firm 2 move to firm 1 due to preference of technology over brand. This fact leads us to the
following condition:
vt12vt21
,vb21vb12
According to this condition, there should be a higher preference for the technology of
firm 1 to 2 and brand ‘2’ to ‘1’. In other words, there should be some kind of relative
preference of customers among both alternatives. This alternative enables a firm to set up a
condition where the second-mover can win the competition when brand equity is valued
above technological features.
Coming back to equations (1) and (2), equations (1) and (2) express a situation where
firm 2 just entered the market. Equation (1) expresses the demand function of firm 1 that
apparently is having a certain market share prior to firm 2’s entrance. The demand
Table 3. . Summary of notations (3).
Notation Definition
vt12Utility of firm 1’s technology ,1 . to firm 2’s technology ,2 .
Y12 Value of alternative technology ,1 . to ,2 .B1 l Average usage of technology at technology
convergence lF Total number of technology convergence sets
in the product (e.g. MP3 þ Camera(1.3mp) or Camera(5.0mp) þ DMB etc.in case of a cell phone)
W Required average technological standard and quality
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intercept is introduced because, in the model, the entire market demand is fixed. It is also
proposed that D $ Q. Due to superior technology compared to firm 2, firm 1 has a certain
market share of customers relying a lot on technology. This is the second block expressed
as mt1Q. But because firm 1 is inferior in brand equity to firm 2, the third block in equation
(1) is expressed as ð12 mb2QÞ. This can be interpreted as the market share residual of the
customers who have chosen firm 2’s brand: people who have stayed in firm 1 and not
moved for greater brand equity. Note that in mt1Q and ð12 mb
2QÞ, the transferring
probability is innate so that mt1Q and ð12 mb
2QÞ both express the customers that have
moved for technology or have decided to stay. The fourth block in equation (1) expresses
the informational difference between firms 1 and 2. Since firm 1 has been longer in
business, it has more information about the product category and its market character. This
is why x1 is proposed to be greater than x2. Deducting the average of all information is
meant to be the information surplus that firm 1 has for being the first-mover in the market.
The average is here the informational degree to stay competitive in the market. Thus, by
multiplying the informational surplus by q1, means that also the information-based source
can enhance firm 1’s customer numbers.
Equation (2) expresses the demand curve of firm 2. Similarly to equation (1), firm 2
enjoys the advantage of having greater brand equity while suffering from the technological
lack compared to firm 1. The main difference in equation (2) to (1) is that firm 2 is starting
its business with the residual demand of firm 1: ðD2 q1Þ2 q2. Likewise in equation (1), in
equation (2), firm 2 gets the customers who are transferring from firm 1 to 2 which is
expressed in the third block of this equation. In the second block, people are staying in firm
2 and are not moving. The last block expresses the informational lack that firm 2 has when
entering the market. Since firm 2 is the second-mover in this market, when it enters, it is
considered that it has market information below the average information which is needed
not to stay vulnerable in the market. By multiplying this information lack by q2, firm 2
loses customers due to information lack. So, when the last block is deducted from the
demand function of firm 2, it can be expressed that information lack is critical for firm 2.
Coming to the real Stackelberg game, we use backward induction to get the optimal
quantity pursued by both firms when both firms are trying to elevate their profits. The final
result of the optimal quantity in firms 1 and 2’s competition yields as follows (the process
getting these results is stated in Appendix 1):
q*
1 ¼ðD̂þ 1ÞðSþ I þ 2
42 ð2Sþ IÞ2 2 Sð1þ SÞ
q*
2 ¼ðD̂þ 1Þð22 3S2 IÞ2 1
42 ð2Sþ IÞ2 2 Sð1þ SÞ
Here, the difference between the market share of customers preferring firm 1’s
technology above firm 2’s brand is denoted as mt1 2 mb
2 ¼ S and cannot be an integer since
it reveals a market segment. Also, the informational gap of firms 1 and 2 is x1 – x2 ¼ I,
where I is 1 . I $ 0 because it refers to positive percentile results from actual survey
results.
Proposition 1
ðmt1 2 mb
2Þ þðx1 2 x2Þ=2
2,
1
4
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Proposition 1 is the condition in this study’s competition that enables firm 2 to win
over firm 1 by its greater brand equity. This result is gained by a simple deduction method
by comparing the size of both q *’s.
As mentioned, to know which q * is greater a simple deduction method is used. Since
both q * values have the same denominator, a comparison between the numerators was
adopted. The basic deduction method was to deductq*
2’s nominator fromq*
1nominator. This
will yield to the result stated below.
ðD̂þ 1Þð4Sþ 2IÞ ¼ 1 ðIÞ
ðD̂þ 1Þð4Sþ 2IÞ , 1 ðiiÞ
ðD̂þ 1Þð4Sþ 2IÞ . 1 ðiiiÞ
(i) is the result when q*
1 ¼ q*
2; (ii) is the result when q*
1 , q*
2; (iii) is the result when
q*
1 . q*
2. So, the condition should fulfill (ii): when brand wins over technology. To get the
desired condition, let’s suppose a situation where there is no demand intercept. D ¼ 0
means the market is not bounded and competition is decided only by Q (in fact, this setting
is closer to the real world situation). Then it should be 4S þ 2I , 1 to make (ii) happen.
Arranging it by S, the expected result is as follows.
S ,1
42
1
2I
Since 1 . I $ 0, in a difference up to 1/4 between the technology market share due to
technology preference of some q2s (mt1) and the brand market share due to brand
preference of some q1s (mb2), the second-mover can win the game over the first-mover.
Further, when information difference between the first-mover and the second-mover is
getting greater, the results converges to (1/4) – (S/2) ¼ 0. In conclusion, it is possible that
brand can overcome the late-movers’ disadvantages providing a maximum of 1/4 in
market share due to higher brand preference for technology and market information. So,
when customers in the market prefer firm 2’s brand over firm 1’s technology and when
firm 2 gets trust from customers due to the values that its brand equity delivers, the second-
mover’s disadvantage as the late-mover can completely be complemented through brand
equity. A
4. Conclusion and Further Research
This study tries to connect the demand function of the first- and second-mover competition
proposed in the Economics literature with the empirically based method in the Marketing
literature for measuring brand and technology (or the technology to produce a certain
attribute into a product) from the consumer level and not the firm level. This model is
special because in previous literature, there was not an attempt to evaluate the influence of
brand in a Stackelberg competition. In other words, there was not an attempt to incorporate
the empirical-based functions in Marketing into the Stackelberg demand curve to make the
demand curve more realistic. By incorporating an equation which is based on consumer
preference into the demand function of the first- and second-mover, the entire demand
curve can be transformed into a function that reflects the actual taste of the customers. It is
though not examined what the customers actually prefer (brand over technology or vice
versa), but by setting up an equation that reflects the actual (empirical) tendency of the
customer, which product of the two firms’ products to buy, this study derives the condition
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in proposition 1 that gives an indication that in some aspects, intangible aspect of a product
such as brand equity can win tangible feature preference.
Some propositions for further research would be the price factor and the product
feature (in)tolerance level to brand when making a purchase decision. As in every market,
price is a critical factor that determines market share. In this research, however, price is set
to be the same so that firms are entirely competing in quantity driven by brand equity and
technology (product feature). But in most of the cases in the real world such products as
the second-mover’s product enter the market having a lower price than the first-mover.
Mostly they set their prices lower than the current market pioneer to avoid direct
competition. Thus, effects of brand and technology under differentiated price competition
are left for further research.
It is also recommended to research the result if prices are differentiated by product
feature and brand. By observing customers facing a situation where they have to choose
between products with ‘higher brand, expensive price’ and ‘lower brand, cheaper price’,
future studies can get a better insight into customer tolerance level of product brand to
technology. Product tolerance level is based on the fact that customers heavily rely on
brand names as a basis for making inferences about product quality (Cox, 1967; Tauber,
1981). Since greater brand equity represents better quality, a situation where the customer
has to decide between an expensive little featured product but with high brand equity and a
cheap, but abundantly featured product with low brand equity, brings about ambivalent
decision making on the customers’ part. Here, it is critical to know until which
technological level and brand equity level this customer does not give up and from which
level it tolerates. Also, this question is left for further research.
Acknowledgements
The author thanks the anonymous reviewers and the journal’s editors for their helpful comments onthis article.
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Appendix 1
Beginning with firm 2’s profit function, it is supposed that firm 2 tried to maximize its profit afterentering the market. The profit function is as given below.
p2 ¼ q2 ðD̂2 q1Þ2 q2 þ ð12 mt1ðq1 þ q2ÞÞ þ mb
2ðq1 þ q2Þ2 ðx1 þ x2
22 x2Þq2
� �ðA1Þ
Since it tried to maximize its profit, (A1) should be derived by q2. Arranging it by q2, the result isas given below.
q2 ¼D̂2 q1ð1þ mt
1 2 mb2Þ þ 1
2ð1þ mt1 2 mb
2Þ þ ðx1 2 x2ÞðA2Þ
Let us denote the difference between the market share in customers’ preference of firm 1’stechnology above firm 2’s brand asmt
1 2 mb2 ¼ S and the informational difference of firms 1 and 2 as
x1 – x2 ¼ I, where I is always 1 . I $ 0. Substituting S and I into equation (A2) yields equation(A3).
q2 ¼D̂2 q1ð1þ SÞ þ 1
2ð1þ SÞ þ IðA3Þ
By substituting q2 into firm 1’s profit function (A4) and deriving it by q1, q1’s best response canbe obtained. Since firm 1 too, had maximized its profit, deriving the profit function of firm 1 by q1 isneeded.
The profit function of q1 is as given below.
p1 ¼ q2 ðD̂2 q1Þ þ mt1ðq1 þ q2Þ þ ð12 mb
2ðq1 þ q2ÞÞ þ ðx1 2x1 þ x2
2Þq1
� �
Deriving it by q1 and arranging it to q1 yields the following result.
q1 ¼D̂2 q2ðm
t1 2 mb
2Þ þ 1
2ð12 mt1 þ mb
2Þ2 ðx1 2 x2ÞðA5Þ
As substituted before, S and I are substituted into equation (A5) which will yield equation (A6).
q1 ¼D̂2 q2Sþ 1
2ð12 SÞ2 IðA6Þ
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Substituting (A3) into (A6) and vice versa, the optimal quantity pursued by each of the firms will beobtained. The results are as follows.
q*
1 ¼ðD̂þ 1ÞðSþ I þ 2Þ
42 ð2Sþ IÞ2 2 Sð1þ SÞðA7Þ
q*
2 ¼ðD̂þ 1Þð22 3S2 IÞ2 1
42 ð2Sþ IÞ2 2 Sð1þ SÞðA8Þ
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