Brand Building to Deter Entry and Its Impact on Brand Value

Abstract

Brand valuation methods have traditionally focused on the value a brand generates via its ability to enhance demand and accordingly profitability. However, this paper explores how a brand can generate value for a firm through the ability to deter entry of new competitors. In this respect, we distinguish between a brand's "direct effect" on demand and its "strategic effect" on the behavior of rival firms. We investigate this within the context of the U.S. stacked chips category using a dynamic model that endogenizes brand building and entry decisions. We find that up to 63% of a brand's value can be attributed to its ability to deter entry. We find that an increase in industry-wide effectiveness of advertising can decrease the value of a firm's brand because, despite enabling more effective brand building, it can weaken the firm's ability to deter entry. Finally, we find that the threat of entry impacts the value of the firm and the value of the brand in qualitatively different ways; as the threat of entry increases, the value of the firm necessarily decreases, but the value of the brand can increase because the ability to use the brand to deter entry becomes more important.

Keywords: Branding; Brand Value; Entry Deterrence; Dynamic Oligopoly