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

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.