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We propose a structural approach to measuring brand and subbrand value using observational data. Brand value is defined as the difference in equilibrium profit between the brand in question and its counterfactual unbranded equivalent on search attributes. Our model allows us to make this computation rigorously, taking into account competitors' and retailers' reactions in the real and counterfactual situations. We illustrate our method using quarterly city-level data on ready-to-eat breakfast cereals, and compare our brand value estimates with those obtained from previously used reduced-form methods. A key advantage of our methodology is that it provides estimates of the value of brands to firms-manufacturers and retailers-taking into account the brand's value to consumers as well as its impact on firm decisions.
Key words: branding; brand equity measurement; new empirical industrial organization
History: This paper was received on September 14, 2006, and was with the authors 11 months for 2 revisions; processed by Tülin Erdem. Published online in Articles in Advance November 5, 2008.
(ProQuest: ... denotes formulae omitted.)
1. Introduction
Brand equity is perhaps the single most important asset that marketing contributes to a firm. In this paper, we develop procedures for measuring brand value in an equilibrium frameworkusing observational data on sales, prices, product attributes, and advertising.1
In our framework, brand value is the extra profit earned by a brand over and above what it would have earned based on its search attributes. Search attributes are the attributes that the consumer can see for herself before buying the product (Nelson 1970, Ford et al. 1990). The distinguishing feature of our approach is that we view the excess profit earned by a brand as a comparison between two equilibria: the equilibrium with the brand as it is, and a counterfactual equilibrium where the brand has "lost" its brand equity but retained its search attributes. In both equilibria, the firm is assumed to be doing the best it can using the brand resources it has at its disposal-the difference is in the resources. Thus, our approach tracks the full implications of brand equity, its impact on the demand side-on consumers' brand choices, as well as its impact on the supply side-on manufacturer and retailer pricing decisions. This contrasts sharply with the previous literature in brand equity/value...