Brand Reallocation, Concentration, and Growth

Abstract

This paper studies the macroeconomic implications of firm-branding activities. We show empirically that firms build market share by creating new brands, developing their existing brands, and buying established brands from other firms. Sales and prices of the underlying branded products tend to rise when a large firm acquires a brand from a small firm. To interpret these findings and quantify the implications, we introduce an endogenous growth model where brand creation, maturity, and reallocation determine both market concentration and economic growth. On net, brand reallocation improves efficiency in the quantified model, even as it increases concentration by over 30%; blocking brand reallocation would reduce welfare by 2%. A tax on brand reallocation alleviates pricing distortions from concentration but nevertheless reduces efficiency by slowing growth. In contrast, a subsidy on brand or firm entry can alleviate pricing distortions and raise growth. In markets with fast maturing brands, subsidies to entry become more effective and blocking brand reallocation becomes more costly. Broadly, our framework finds that effective industrial policies require attention to brand maturity, heterogeneity, and fit with the production and distribution capabilities of the parent firm.

Keywords: Endogenous Growth, Firm Dynamics, Productivity, Market Concentration, Product Innovation, Reallocation, Mergers & Acquisitions, Brands, Trademarks, Intangible Assets

JEL Classification: O31, O32, O34, O41, D22, D43, L11, L13, L22