Co-branding strategies and alliance coordination under different risk preferences

Abstract

This paper considers a co-branding project where two brands (Brands 1 and 2) jointly invest in product quality improvement to launch a co-branded product, and this project may bring positive or negative effects to the original product lines. Facing uncertainty, the brand managers can have a risk-neutral, risk-averse, or risk-seeking attitude. We first derive the equilibrium quality investment and pricing strategies, and then investigate the impacts of risk attitudes. We find that, given a high profit-sharing rate, the selling price experiences an increase with the level of risk aversion of Brand 1 or the level of risk seeking of Brand 2. Interestingly, Brand 1’s risk aversion can make itself better off, but always hurts Brand 2. Both brands suffer from the risk aversion of Brand 2. A brand's risk seeking is always detrimental to itself, but can be beneficial to the cooperating brand. Moreover, given two brands' risk preferences, we find the regions where the brand alliance is perfectly coordinated so that both brands are better off.