Can brand extension suppress low-quality competing products encroaching?

The encroachment of new competing manufacturers poses a significant threat to established brand manufacturers. This paper focuses on the scenario where new competing manufacturers purchase products from established brand manufacturers and blend them with lower-cost alternatives to develop low-quality competing products. It delves into whether such encroachment consistently undermines the brand manufacturer and whether the brand manufacturer can effectively suppress it through brand extension strategies. Three game-theoretical models are constructed to analyze the impacts of competing product invasion on the brand manufacturer: no competitor encroaching (benchmark), competitor encroaching, and brand extension to a low-end sub-brand. By comparing the equilibrium pricing decisions and profits across these models, it reveals that the profits of both the brand manufacturer and the competing manufacturer may increase with the quality of competing products under the competitor encroaching model and the brand extension to a low-end sub-brand model. Compared to the benchmark, the encroachment by competing manufacturers may help the brand manufacturer achieve higher profits due to the trade-off between market competition and profits from competing product sales. Compared to the competitor encroaching model, launching a low-end sub-brand can reduce the profit of the competing manufacturer, thereby suppressing competing manufacturers’ encroachment in some situations. Additionally, extending the brand to a high-end sub-brand is explored, revealing that while it increases the brand manufacturer’s profit, it may lead to cannibalization.