Omega 110 (2022) 102626

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Omega
journal homepage: www.elsevier.com/locate/omega

Brand extension and channel structure: An analysis of the effects of

social influenceR
Haiqing Song a, Housheng Duan b, Sijing Deng c,∗, Jiayan Xu a
a
School of Business, Sun Yat-sen University, Guangzhou 510275, China
b
Lingnan College, Sun Yat-sen University, Guangzhou 510275, China
c
School of Economics and Management, South China Normal University, Guangzhou 510006, China

a r t i c l e i n f o a b s t r a c t

Article history: We observe in practice that manufacturers of conspicuous or luxury goods extend their major brands to
Received 1 June 2021 the low-end market with different channel structures. The brand extension will cause social influence
Accepted 14 February 2022
between the parent and sub brands. On one hand, the high-end consumers are less willing to buy the
Available online 19 February 2022
parent brand due to the sub brand sales to the low-end market. On the other hand, the low-end con-
Keywords: sumers may find the sub brand more attractive with parent brand sales to the high-end market. In this
Supply chain management paper, we build a game-theoretical model to study the impacts of social influence on a luxury good man-
Social influence ufacturer, which sells the parent brand through a retailer and has the option of extending to a sub brand
Brand extension under different channel structures. Specifically, we study the following three brand extension structures:
Channel structure brand extension with the same retailer, with different retailers, and with direct selling. We study and
compare the equilibrium decisions and profits across different structures, and find that social influence
and channel structure have significant impacts on the brand extension decisions and profits. For exam-
ple, as the positive influence of the parent brand on the sub brand’s sales increases, the manufacturer’s
and retailer’s equilibrium profits may decrease under brand extension. Compared to the benchmark of no
sub brand, both the manufacturer and retailer get higher profits under brand extension with the same
retailer. Under the other two extension structures, however, the manufacturer’s and retailer’s profits may
be lower. Interestingly, the retailer’s profit from selling both the parent and sub brands may be even
lower than that of selling the parent brand only.
© 2022 Elsevier Ltd. All rights reserved.

1. Introduction The fast development of the Chinese liquor industry accelerates

Brand name plays an important role in the marketing of con-
spicuous or luxury goods. According to market research organi-
zation Millward Brown, global famous luxury brands, like Louis
Vuitton, Chanel, and Hermes, all have brand values of more than
$30 billion in 2020. In China, the high-end liquor brands, such as
Moutai, Wuliangye, and National Pits 1573, are considered as luxu-
ries. Moutai, the most famous liquor company, has a brand value of
$53.755 billion, and has surpassed Louis Vuitton ($51.777 billion)
and become the world’s largest luxury brand according to Mill-
ward Brown. In addition, Brand Finance, a brand valuation agency,
investigates and finds that Moutai topped the list of “Top 50 Most
Valuable Spirit Brands” in the field of alcoholic drinks with $39.332
billion brand value in 2020.
R
Area: Supply Chain Management. This manuscript was processed by Associate
Editor Bhaskaran.
∗
Corresponding author.
E-mail address: sjdeng@m.scnu.edu.cn (S. Deng).
the competition of liquor market in China. Dozens of famous liquor
companies extend their major brands to the low-end market to en-
hance competitiveness and profits. For example, Wuliangye, in ad-
dition to selling its high-end liquor brand “Wuliangye” in the mar-
ket, extends the brand line and creates a number of low-end sub
brands, such as “Wuliangchun” and “WuliangPTVIP”. At peak time,
Wuliangye once had hundreds of sub brands and made its way to
be the first largest Chinese liquor brand in China. However, extend-
ing too many sub brands caused the erosion of Wuliangye’s brand
image, which led to the decrease of the major band’s sales and
the decline in Wuliangye. Moutai, with its strong competitiveness
in the high-end markets, extends the major brand downward to
the low-end markets to obtain higher market shares and profits.
Moutai creates “‘Moutaiwangzi”, “Moutaibeer”, and “Moutaiwine”
in the liquor market, beer market and wine market, respectively.
The phenomenon of brand extension is also widely observed in
other industries. For example, in the automobile industry, BMW

https://doi.org/10.1016/j.omega.2022.102626
0305-0483/© 2022 Elsevier Ltd. All rights reserved.
H. Song, H. Duan, S. Deng et al.
and Mercedes extend their brands downward to cater to low-end
markets [1,2].
Previous literature have shown that the brand extension of
manufacturers will cause social influence between the parent
brand and sub brand demands [2,3]. On one hand, the low-end
sub brand has negative influence on the high-end parent brand:
the high-end consumers, who pursue uniqueness, are less willing
to buy the parent brand due to the existence of the sub brand
purchase from the low-end consumers. On the other hand, the
high-end parent brand has positive influence on the low-end sub
brand: the low-end consumers, who are trend followers, may find
the sub brand more attractive with parent brand sales to high-end
consumers. Therefore, in making the brand extension decision, the
luxury good manufacturer should tradeoff the gains from the new
low-end market and the potential negative influence on the origi-
nal parent brand.
In addition, we observe in practice that manufacturers of con-
spicuous or luxury goods extend their major brands to the low-end
market with different channel structures. For example, Moutai ex-
tends the brand line, and distributes sub brands through the same
retailer that sells the parent brand. However, other famous liquor
companies, such as Wuliangye and Luzhoulaojiao, sell sub brands
through new retailers, or even directly sell sub brands to end con-
sumers. What are the main drivers for manufacturers to choose
different brand extension structures? To the best of our knowl-
edge, previous literature did not study the channel structure is-
sue of brand extension with the consideration of social influences.
Therefore, it is important and interesting to investigate the differ-
ent channel structures of the luxury good manufacturers.
Based on the above observations, we want to investigate the
following research questions. First, compared to the benchmark of
no sub brand, what is the impact of the sub brand on the man-
ufacturer’s and retailer’s optimal decisions and profits? Second,
does the channel structure have a significant impact on the deci-
sions and profits? Third, does the retailer benefit from selling both
the parent and sub brands? Last but not least, what’s the optimal
channel structure for the manufacturer, and is it best for the man-
ufacturer to directly sell the sub brand to the end consumers?
We build a game-theoretic model to study the above questions.
We focus on a supply chain consisting of a manufacturer and a
retailer. The manufacturer sells the parent brand through the re-
tailer and has the option of extending to a sub brand. Specifically,
this paper investigates and compares the following four models:
no sub brand, brand extension with the same retailer, brand ex-
tension with different retailers, and brand extension with direct
selling. Among them, the model of no sub brand is treated as the
benchmark, where there is no brand extension and the manufac-
turer only produces and sells the parent brand through the re-
tailer. Under brand extension with the same retailer, the manufac-
turer extends the brand line, and sells both parent and sub brands
through the same retailer. Under brand extension with different
retailers, the manufacturer extends the brand line, and sells the
sub brand through a new retailer. Under brand extension with di-
rect selling, the manufacturer extends the brand line, and directly
sells the sub brand to the end consumers. Under each model, we
investigate the equilibrium decisions and profits of the manufac-
turer and retailer, and find that social influence and channel struc-
ture have significant impacts on the brand extension decisions and
profits. The main results are summarized as follows.
We show that as the negative influence of the sub brand on
the parent brand’s sales increases, the manufacturer’s equilibrium
profit always decreases, but the retailer’s equilibrium profit may
increase under brand extension with direct selling. As the positive
influence of the parent brand on the sub brand’s sales increases,
the manufacturer’s and retailer’s equilibrium profits may decrease
under brand extension with different retailers (and direct selling).
2
Omega 110 (2022) 102626
Under brand extension with direct selling, the negative social influ-
ence from the sub brand is the strongest. To mitigate the social in-
fluence, the manufacturer significantly reduces the wholesale price
for the parent brand. Therefore, the wholesale price and retail price
for the parent brand are the lowest among all extension structures.
We also investigate the manufacturer’s and retailer’s prefer-
ences about different channel structures. Compared to the bench-
mark of no sub brand, both the manufacturer and retailer get
higher profits under brand extension with the same retailer. In
this case, the brand extension achieves a win-win solution. Under
the other two brand extension structures, however, the manufac-
turer’s profit or the retailer’s profit may be lower. From the per-
spective of the brand manufacturer, each brand extension structure
has its own advantage, and there is no dominant structure. When
the market potential of the sub brand is large enough, the manu-
facturer prefers to sell the sub brand directly to the end customers.
Otherwise, it is better for the manufacturer to sell the sub brand
through the existing or a new retailer to better mitigate the nega-
tive social influence. Interestingly, we find that the retailer’s profit
from selling both the parent and sub brands may be even lower
than that of selling the parent brand only. Furthermore, the retailer
prefers brand extension with direct selling to brand extension with
different retailers, even if direct selling of the manufacturer causes
significant negative influence on the parent brand’s sales.
The rest of the paper is organized as follows. Section 2 reviews
the related literature. Section 3 presents the model formulation of
the four models and analyzes the equilibria. We also investigate
the impacts of market potentials and social influences on the equi-
librium decisions and profits of the manufacturer and retailer. The
comparisons across different models are presented in Section 4.
Section 5 concludes the paper and gives some future research di-
rections. All proofs are relegated to the appendix.
2. Literature review
This paper studies supply chain management for conspicuous
or luxury goods. Hence, we first review the literature related to
conspicuous consumption. It is well believed that consumers pur-
chase luxury goods with a goal of not just satisfying their material
needs but also their social needs such as prestige and “upper-class”
image [4–7]. The luxury market consists of consumers who desire
uniqueness and some others who desire conformism, and the for-
mer prefer distinguishing themselves from the latter [8–10]. Amal-
doss and Jain [3] study the pricing of conspicuous luxury prod-
ucts in the presence of two groups of consumers in the market,
namely snobs and followers, whose demand functions are inter-
related. Shen et al. [11] investigate the optimal prices and services
decisions in a luxury fashion supply chain with social influences
and demand changes, and find that when the impacts of social
influences are increasing, the supply chain is more likely to pro-
vide better services to the fashion leader group than the fashion
follower group. Zhang et al. [12] study market targeting and infor-
mation sharing problem in a luxury supply chain with social in-
fluences, and find that the manufacturer makes different market-
targeting schedules in response to different signals. In addition,
some literature focus on the optimal advertising and pricing deci-
sions for luxury fashion brands, and find that the optimal strategy
is to allocate all advertising budget to one group of consumers only
[13,14].
Our paper is similar to the above literature, and studies the im-
pacts of social influences on a luxury good manufacturer which
sells product to two groups of customers. However, the above pa-
pers consider the firm that only sells one type of product. Differ-
ently, we study the scenario where the manufacturer has the op-
tion of producing two types of products and extending the parent
brand to sub brand to serve the low-end market.
H. Song, H. Duan, S. Deng et al.
A large stream of literature studies the brand extension prob-
lem [1,15–18]. With regard to product quality, when a firm stakes
its reputation by extending its established brand name to a new
brand, consumers tend to believe that the quality of the new prod-
uct is high. However, an unsuccessful brand extension could reduce
a firm’s ability to introduce new brands in the future [16,19]. Case
[20] believes that conspicuous brands risk losing their prestige if
they cater to the masses, but a lot of famous companies extend
their brands downward to serve the low-end markets in reality.
Miklós-Thal [21] shows that branding may not necessarily signal
that the new brand has a high quality but could signal a positive
correlation between the qualities of the parent brand and the new
brand. With regard to social influences, Amaldoss and Jain [2] an-
alyze how social effects and market structure influence the brand-
ing of conspicuous goods, and find that a monopolist would prefer
not to use the same brand name to extend to the sub brand when
consumers’ desire for uniqueness is high, while in a competitive
market using the same brand name to extend to the sub brand is
better when consumers have a high level of desire for uniqueness.
The literature mentioned above mainly focus on the product
quality aspect of the brand extension. In this paper, we assume
product quality is exogenous given, and study the social influence
effect resulting from brand extension. Our study is similar to Amal-
doss and Jain [2], who also study the social influences and brand
extension. However, they mainly address the impacts of market
structure, i.e., monopolistic and competitive markets. Differently,
we aim to investigate different channel structures of brand exten-
sion: with the same retailer, with different retailers, and with di-
rect selling. The results derived in our paper could shed light on
how to choose a suitable channel structure for the sub brand in
consideration of social influences.
Our work is also related to the literature that studies channel
structures. A stream of literature studies the dual channel where a
manufacturer sells its products through a hybrid channel structure:
the direct channel (or e-channel) where the manufacturer sells its
own products to consumers directly, and the indirect channel (or
off-line shop) where the manufacturer sells through some inter-
mediaries like retailers [22–30]. Chiang et al. [31] study the dual-
channel supply chain design, and find that the direct channel may
not always be detrimental to the retailer because it will be accom-
panied by a wholesale price reduction. Huang and Swaminathan
[32] study the optimal pricing strategies when a product is sold by
two channels such as the Internet and a traditional channel, and
provide theoretical bounds for these pricing strategies. Wang et al.
[33] explore the channel selection and pricing strategy in a sup-
ply chain that consists of a dominant multi-channel retailer, and a
manufacturer, and show that the gap between the online and of-
fline channels’ operating costs is critical to the retailer’s channel
strategy. Yi et al. [34] investigate how fairness-seeking behavior
affects a manufacturer’s distribution channel selection, and show
that adopting agent selling is better for the manufacturer when
consumers are extremely fairness-minded. Li et al. [35] study the
online market entry and channel sharing strategy with direct sell-
ing, and show that selling a higher-quality store brand may hurt
the retailer’s profit once the store brand’s quality exceeds a certain
threshold.
Many papers study the channel structure that consists of one
manufacturer and two competing retailers [36–40]. Ingene and
Parry [41] explore the vertical channel coordination in a supply
chain where a manufacturer sells its products through competing
retailers and treats them equally. Yang and Zhou [42] study the
pricing problem in a two-echelon supply chain with a manufac-
turer who supplies a single product to two competing retailers. As-
suming that the manufacturer acts as a Stackelberg leader, they ex-
plore the effects of the duopolistic retailers’ different power struc-
tures on supply chain players. Based on Yang and Zhou [42], Wu
3
Omega 110 (2022) 102626
et al. [43] investigate the pricing decisions in a non-cooperative
supply chain which consists of two retailers and one common sup-
plier. They study different models where the two retailers play
Stackelberg or Bertrand games under three possible power struc-
tures. In addition, some papers consider a two-echelon supply
chain with two manufacturers and one common retailer [44–46].
Choi [47] first studies the pricing competition problem under this
structure. Huang and Ke [48] investigate the pricing problem when
two different manufacturers compete to distribute differentiated
but substitutable products through a common retailer under dif-
ferent power structures. It is found that if the sales cost is high,
consumers can enjoy lower prices when facing a powerful retailer,
and that the super retailer can make the supply chain more effi-
cient.
Similar to the literature above, we study the channel strategy of
the manufacturer which sells the parent brand through the indi-
rect channel and has the option of brand extension. The above pa-
pers consider one product or two competing (substitutable) prod-
ucts. Differently, we study the social influence between the manu-
facturer’s two brands of products that do not compete with each.
However, the sales of sub brand will influence the sales of the
parent brand, and vice versa. Specifically, we study the following
three brand extension structures: brand extension with the same
retailer, with different retailers, and with direct selling. We find
that the social influences have significant impacts on the manufac-
turer’s channel preference and profits.
There is a rich literature on product lines and the impact of
cannibalization. For example, Desai [49] examines whether the
cannibalization affects a firm’s price and quality decisions in a
model with consumer differences in quality valuations and taste
preferences, under both monopoly and duopoly settings. Netes-
sine and Taylor [50] characterize the impact of production tech-
nology on the optimal product line design with the considera-
tion of demand cannibalization. Kim et al. [51] investigate the im-
pact of commonality strategy on product line design, and find that
commonality can actually relieve cannibalization under a nondom-
inating preference structure. In this paper, we study the brand
extension (or product line design) of the luxury goods. Different
from the above literature, we focus on the impacts of social in-
fluence between the parent and sub brands of luxury goods, rather
than the direct competition between different products. We further
compare three different channel structures for brand extension.
There is also literature on private label brands, and how these
extensions impact firms and channel behavior [52,53]. These pa-
pers study the impacts of downstream firms’ product extension on
supply chain decisions and profits. Differently, we study the brand
extension problem of the upstream manufacturer, and address the
impact of social influence between the parent and sub brands. We
further compare three different channel structures for brand exten-
sion.
3. Models and analysis
3.1. Model description
Based on our observations about Moutai and Wuliangye, we
build a supply chain consisting of a manufacturer and a retailer. At
the beginning, the manufacturer produces a parent brand product,
and the retailer procures from the manufacturer and then sells the
product to the end customers. To explore low-end markets and im-
prove product structure, the manufacturer has an option to extend
its established parent brand name to a sub brand. Similar to Amal-
doss and Jain [2], we assume that there is no substitutability be-
tween the parent brand and sub brand, and markets for these two
brands are separated: the high-end consumers will only buy the
parent brand, and the low-end consumers will only buy the sub
H. Song, H. Duan, S. Deng et al. Omega 110 (2022) 102626

brand. However, the parent and sub brands have social influences Table 1
Summary of notations.
with each other. On one hand, the high-end consumers prefer a
brand that is different from the brand chosen by low-end con- a1 market potential of the parent brand
sumers, and we call high-end consumers as “snobs”; on the other a2 market potential of the sub brand
hand, the low-end consumers like to use the brand that snobs use, λ1 the negative effect of sub brand on the parent brand’s sales
and we call low-end consumers as “followers”. Similar to previ- λ2 the positive effect of parent brand on the sub brand’s sales
ous literature (see, [2,3,11,13,14], we assume that if the sub brand’s p1 retail price of the parent brand
p2 retail price of the sub brand
sales to followers increases, then the market demand from snobs
q1 selling quantity of the parent brand
decreases, and that if the parent brand’s sales to snobs increases, q2 selling quantity of the sub brand
then the market demand from followers increases. w1 wholesale price for the parent brand
We use subscripts m, r, 1, 2 to denote the manufacturer, the re- w2 wholesale price for the sub brand
tailer, the parent brand, and the sub brand, respectively. Following
previous studies (see, [2,3,11,14], we assume that the market de-
mands of the parent brand and sub brand are as follows: with different retailers (denoted as model D), and brand exten-
sion with direct selling (denoted as model O). Under model N (the
q1 = a1 − β1 p1 − λ e
1 q2 ,
benchmark scenario), there’s no brand extension and the manu-
facturer only produces and sells the parent brand. Under model S,
q2 = a2 − β2 p2 + λ2 qe1 , the manufacturer extends the brand line, and sells both parent and
sub brands through the same retailer. Under model D, the manu-
where ai , βi , λi , and pi represent the market potentials, price sen-
facturer extends and sells the sub brand through a new retailer.
sitivities, social influences and retail prices of two brands. Specif-
Under model O, the manufacturer extends and directly sells the
ically, λ1 measures the negative effect of sub brand on the par-
sub brand to end consumers. We use superscripts N, S, D and O to
ent brand’s sales, and it reflects the degree to which snobs prefer
represent the four models respectively.
to consume a brand that is different from the brand that follow-
ers use; λ2 measures the positive effect of parent brand on the
3.2. Model N: no sub brand
sub brand’s sales, and it captures the desire of followers to use the
brand that snobs consume. qe1 is the expected sales of parent brad
The supply chain under model N is composed of a manufacturer
to the snobs, and qe2 is the expected sales of sub brad to the fol-
and a retailer. The manufacturer sells the parent brand through the
lowers. Based on demand expectations, the consumers make pur-
retailer. The decision sequence is presented as follows. The man-
chasing decisions. As is common in the literature [2,3], we assume
ufacturer first determines the wholesale price w1 for the parent
that consumers form rational expectations. Therefore, we study the
brand product offered to the downstream retailer. The retailer then
rational expectations equilibrium where the realized demands are
determines the retail price p1 of the parent brand. The profit func-
consistent with the demand expectations, i.e., qi = qei . In reality, the
tions of the manufacturer and the retailer are given as:
negative social influence is usually more significant as compared to
the positive social influence. Therefore, we assume λ1 ≥ λ2 in our πm = w 1 ( a 1 − p 1 ) , (1)
base model. We discuss the case where λ2 > λ1 in Section 5.2, and
find that our main results are qualitatively robust.
We further assume that consumers do not have the above so-
πr = ( p1 − w1 )(a1 − p1 ). (2)
cial influences unless the manufacturer extends its parent brand to By backward induction, we can get the equilibrium results
the sub brand [2,15,21]. That is, under no brand extension, the de- which are summarized in Proposition 1.
mand of the parent brand is q1 = a1 − β1 p1 . Without loss of gen-
erality, we assume that the production costs of both brands are Proposition 1. Under no sub brand model, the manufacturer’s equi-
zero (if not zero, they could be easily incorporated into the mar- librium wholesale price, the retailer’s equilibrium retail price, and the
ket potentials, and all results remain qualitatively the same), and equilibrium selling quantity of the parent brand are as follows:
that the price sensitivities of both brands are equal to 1. If price a1 3a1 a1
wN1 = , pN1 = , qN1 = .
sensitivities are not equal to 1, we can transform demand func- 2 4 4
tions and all analysis remains intact. To ensure the coexistence Substituting the equilibrium decisions into profit functions (1
of the parent brand and sub brand, we assume that the param- and 2), we can obtain the manufacturer’s equilibrium profit πm N
eters satisfy the following regularity assumption 0 < λ1 < 1, 0 < and the retailer’s equilibrium profit πrN as follows:
λ31 λ1 −λ2 8+6λ1 λ2 −2λ22
λ2 < 3+λ21
, <
a2
<
4(λ1 +λ2 )+λ1 λ2 (3λ1 +2λ2 +λ21 λ2 )
. The assump-
2 a1 a21 a21
tion about λ1 indicates that the negative social influence should πmN = , πrN = .
8 16
be lower than the price sensitivity, which is normalized to one.
The assumption about λ2 indicates that the positive social influ- 3.3. Model S: brand extension with the same retailer
ence should be relatively small as compared to the negative social
influence. The assumption about a2 /a1 indicates that the market Under model S, the manufacturer extends the brand line, and
potential of the sub brand should be in a middle range. Without sells both parent and sub brands through the same retailer. The
the above regularity assumption, the parent brand (or sub brand) decision sequence under model S is as follows. First, the manufac-
will be expelled out of the market. That is, the selling quantity of turer determines the wholesale prices w1 and w2 . Then, the re-
the parent brand (or sub brand) will be zero. This is not partic- tailer determines the retail prices p1 and p2 . The profit functions
ularly interesting because our main research goal is to study the of the manufacturer and the retailer are as follows:
interaction between the parent brand and sub brand. Similar as-
πm = w1 (a1 − p1 − λ1 q2 ) + w2 (a2 − p2 + λ2 q1 ), (3)
sumptions can be found in previous research [54,55]. Table 1 sum-
marizes the notations in our model.
This paper mainly studies the following four supply chain struc-
tures (see Fig. 1): no sub brand (denoted as model N), brand exten- πr = ( p1 − w1 )(a1 − p1 − λ1 q2 ) + ( p2 − w2 )(a2 − p2 + λ2 q1 ).
sion with the same retailer (denoted as model S), brand extension (4)

4
H. Song, H. Duan, S. Deng et al. Omega 110 (2022) 102626

Fig. 1. Supply chain structures.

By backward induction, we can get the equilibrium results sub brand on the parent brand’s sales (i.e., λ1 ) is relatively small,
which are summarized in the following proposition. as λ1 increases, the retailer would raise the retail price of sub
brand pS2 to restrict the sub brand’s sales qS2 and mitigate the neg-
Proposition 2. Under brand extension with the same retailer, the
ative social influence. In this case, and the manufacturer’s profit
equilibrium wholesale prices, retail prices, and selling quantities of the
loss in the sub brand is very significant, leading to the decreased
parent brand and sub brand are as follows:
profit of the manufacturer. However, when the negative influence
a1 a2 of sub brand (i.e., λ1 ) is relatively large, as λ1 increases, the neg-
wS1 = , wS2 = ,
2 2 ative influence on the parent brand’s sales becomes more signifi-
cant, and the manufacturer’s profit is dominated by the profit loss
  in the parent brand, leading to the decreased profit of the manu-
a1 λ21 − 3λ1 λ2 + 2λ22 − 6 + a2 (λ1 + λ2 )
pS1 =   , facturer. The impact of λ2 on the manufacturer’s profit is opposite
2 λ21 − 2λ1 λ2 + λ22 − 4 to that of λ1 , and is thus omitted here. The impacts of λ1 and λ2
  on the retailer’s profit are the same as the manufacturer, because
a2 2λ21 − 3λ1 λ2 + λ22 − 6 − a1 (λ1 + λ2 )
S
p2 =   , both the retailer and manufacturer sell the two brands of products.
2 λ21 − 2λ1 λ2 + λ22 − 4 Corollary 2 compares the equilibrium decisions and profits of
the supply chain players under brand extension with the same re-
2a1 − a2 (λ1 − λ2 ) 2a2 − a1 (λ1 − λ2 )
qS1 = , qS2 = . tailer and the benchmark scenario of no sub brand.
8 − 2λ21 + 4λ1 λ2 − 2λ22 8 − 2λ21 + 4λ1 λ2 − 2λ22
Corollary 2. wS1 = wN , pS1 < pN , qS1 < qN , πm
S > π N, π S > π N.
m r r
Substituting the equilibrium results into profit functions (3 and 1 1 1
4), we can obtain the equilibrium profits of the manufacturer and
Both the manufacturer and the retailer sell two brands and have
retailer as follows:
the same profit target under brand extension with the same re-
a2 + a1 a2 (λ2 − λ1 ) + a22 a2 + a1 a2 (λ2 − λ1 ) + a22 tailer. Therefore, the manufacturer in this case keeps the wholesale
πmS = 1  , πrS = 1 .
2 4 − λ + 2λ1 λ2 − λ
2
1
2
2
4 4 − λ21 + 2λ1 λ2 − λ22 price of the parent brand unchanged, and leaves the two brands
to be balanced by the retailers’ retail prices. That’s the main rea-
Corollary 1 discusses the impacts of market potentials and so- son why the manufacturer’s wholesale price for the parent brand
cial influences on the manufacturer’s and retailer’s equilibrium is the same as the benchmark scenario of no brand extension. Con-
profits. sidering the sub brand sales, the retailer lowers the retail price
of the parent brand to mitigate the influence from the sub brand.
Corollary 1. (a) πmS and π S increase with a and a , respectively.
r 1 2
However, the positive effect of price reduction is dominated by the
(b) πm
S and π S decrease with λ , but increase with λ .
r 1 2
negative effect of social influence, and the selling quantity of the
Corollary 1 shows that the increase of parent brand’s market parent brand is lower as compared to the benchmark. Furthermore,
potential a1 (or sub brand’s market potential a2 ) emboldens the with the additional sales of sub brand product to the low-end mar-
wholesale price, retail price, and selling quantity of the parent ket, both the manufacturer and retailer benefit from the brand ex-
brand (or sub brand), and both the manufacturer and retailer ob- tension.
tain higher profits. In addition, we find that the manufacturer’s Note that if there is no social influence between the parent
profit decreases with λ1 . Specifically, when the negative effect of brand and sub brand (i.e., λ1 = λ2 = 0), the wholesale price, retail

5
H. Song, H. Duan, S. Deng et al.
price and selling quantity of the parent brand remain unchanged,
and the manufacturer’s and retailer’s profits increase, as compared
to the benchmark scenario of no brand extension.
3.4. Model D: brand extension with different retailers
Under model D, the manufacturer extends the brand line, and
sells the sub brand through a new retailer. We use subscript r1 to
represent the retailer 1 that sells the parent brand, and subscript
r2 to represent the retailer 2 that sells the sub brand. The decision
sequence under model D is as follows. First, the manufacturer de-
termines the wholesale prices w1 and w2 . Then, retailer 1 and re-
tailer 2 simultaneously determine the retail prices p1 and p2 . The
profit functions of the manufacturer and two retailers are as fol-
lows:
πm = w1 (a1 − p1 − λ1 q2 ) + w2 (a2 − p2 + λ2 q1 ),
πr1 = ( p1 − w1 )(a1 − p1 − λ1 q2 ),
πr2 = ( p2 − w2 )(a2 − p2 + λ2 q1 ).
By backward induction, we can get the equilibrium results
which are summarized in the following proposition.
Proposition 3. Under brand extension with different retailers, the
equilibrium wholesale prices, retail prices, and selling quantities of the
parent brand and sub brand are as follows:
     
a1 2λ21 λ22 + 9λ1 λ2 − λ22 + 8 −a2
λ21 λ2 +λ1 λ22 +2 + 2λ2
wD1 =  
λ21 4λ22 − 1 +18λ1 λ2 − λ22 + 16
       
a1 λ21 λ2 + λ1 λ22 + 2 +2λ2 +a2 λ21 2λ22 −1 +9λ1 λ2 + 8
wD2 =  
λ21 4λ22 − 1 +18λ1 λ2 − λ22 + 16
   
a1 4λ21 λ22 + 15λ1 λ2 − λ22 + 12 − a2 2λ21 λ2 + 3λ1 + λ2
D
p1 =   , ket is relatively important and the negative influence of the sub
λ21 4λ22 − 1 + 18λ1 λ2 − λ22 + 16
     
a1 2λ1 λ22 + λ1 + 3λ2 + a2 λ21 4λ22 − 1 + 15λ1 λ2 + 12
D
p2 =  
λ21 4λ22 − 1 + 18λ1 λ2 − λ22 + 16
2a1 (λ1 λ2 + 2 ) + a2 (λ2 − λ1 )
qD1 =   ,
λ21 4λ22 − 1 + 18λ1 λ2 − λ22 + 16
2a2 (λ1 λ2 + 2 ) + a1 (λ2 − λ1 )
qD2 =   . negative influence on the parent brand becomes stronger, leading
λ21 4λ22 − 1 + 18λ1 λ2 − λ22 + 16
Substituting the equilibrium results of Proposition 3 into profit
functions (5–7), we can obtain the equilibrium profits of the man-
ufacturer and retailers as follows:
a21 (λ1 λ2 + 2 ) + a1 a2 (λ2 − λ1 ) + a22 (λ1 λ2 + 2 )
πmD =   , the manufacturer but it causes significant negative influence on the
λ21 4λ22 − 1 + 18λ1 λ2 − λ22 + 16
(λ1 λ2 + 1 )(2a1 (λ1 λ2 + 2 ) + a2 (λ2 − λ1 ))2
πrD1 =  2 2   , in the decreasing profit of the manufacturer from the sub brand
λ1 4λ2 − 1 + 18λ1 λ2 − λ22 + 16 2
(λ1 λ2 + 1 )(a1 (λ2 − λ1 ) + 2a2 (λ1 λ2 + 2 ))2
πrD2 =  2 2   .
λ1 4λ2 − 1 + 18λ1 λ2 − λ22 + 16 2
Corollaries 3 and 4 discuss the impacts of market potentials and
social influences on supply chain players’ equilibrium profits.
Corollary 3. (a) πm D and π D increase with a , and π D decreases with
r1 1 r2
a1 .
(b) πm
D and π D increase with a , and π D decreases with a .
r2 2 r1 2 the sub brand’s market potential and influence are relatively small,
Omega 110 (2022) 102626
We observe from Corollary 3 that the impacts of the parent
brand’s market potential a1 on the manufacturer’s and retailer
1’s profits are the same as Corollary 1. However, as a1 increases,
the parent brand becomes more important and the manufacturer
would raise the wholesale price for the sub brand to suppress sales
of the sub brand and corresponding negative influence on parent
brand, leading to the decrease of the retailer 2’s profit. As the sub
brand’s market potential a2 increase, both the manufacturer and
retailer 2 benefit from the enlarged market. However, due to the
negative influence from the sub brand’s sales, the retailer 1’s profit
shrinks.
Corollary 4. (a) πm
D , π D and π D decrease with λ .
r1 r2 1
(b) There exist thresholds K1 and K2 such that when λ1 < 12 , K1 <
< K2 , πmD increases with λ ; otherwise, π D decreases with λ .
a2
a1 2 m 2
(5) (c) There exist thresholds K3 , K4 and K5 such that when λ1 >
K3 , λ2 > K4 , a2 < K5 , πrD1 decreases with λ2 ; otherwise, πrD1 increases
a
1
with λ2 .
(6) (d) πrD2 increases with λ2 .
With the increase of negative social influence λ1 , the sell-
(7)
ing quantity of the parent brand decreases, and the manufacturer
would also raise the wholesale price for the sub brand to suppress
its sales and corresponding negative impact, which results in the
decreasing profit of the manufacturer from both parent and sub
brands. In this case, the manufacturer’s overall profit definitely de-
creases. As λ1 increases, the sales of parent brand and retailer 1’s
profit decrease due to the stronger negative social influence. For
retailer 2, as λ1 increases, the wholesale price for the sub brand
, increases and the sales decreases, both of which lead to the de-
crease of retailer 2’s profit.
Corollary 4 (b) indicates that the impact of the positive influ-
, ence λ2 on the manufacturer’s profit depends on λ1 and the rela-
tive market potential a2 . When λ1 is lower than a certain threshold
a
1
a
and a2 is in a moderate range, the manufacturer’s sub brand mar-
1
brand’s sales is relatively small. As λ2 increases, the selling quan-
tity of the sub brand increases and the manufacturer’s profit loss in
parent brand is dominated by the profit gain in sub brand, leading
, to the increasing total profit of the manufacturer. However, when
λ1 is lower than a certain threshold and aa21 is relatively small or
large, the manufacturer’s profit decreases with λ2 . The reasons are
as follows. On one hand, when both λ1 and a2 are relatively small,
a
1
the sub brand market is less important for the manufacturer. As λ2
increases, the selling quantity of the sub brand increases, and its
to the decrease of wholesale price and selling quantity of the par-
ent brand. In this case, the manufacturer’s profit gain in sub brand
is dominated by the profit loss in parent brand, and its total profit
decreases. On the other hand, when λ1 is relatively small but a2
a
1
is relatively large, the sub brand market is relatively important for
parent brand’s sales, and then the manufacturer would raise the
wholesale price for the sub brand to suppress the sales, resulting
market. In this case, the manufacturer’s overall profit decreases.
When λ1 is relatively large, the negative social influence from the
sub brand is very significant. As λ2 increases, this negative influ-
ence becomes even more significant, and the manufacturer’s over-
all profit decreases.
Corollary 4 (c) shows that when λ1 and λ2 are relatively large,
and a2 is relatively small, with the increase of λ2 , the selling quan-
a
1
tity and negative social influence of the sub brand increases, and
the selling quantity of the parent brand decreases. However, since
6
H. Song, H. Duan, S. Deng et al. Omega 110 (2022) 102626

the reduction of the wholesale price offered by the manufacturer Proposition 4. Under brand extension with direct selling, the equilib-
for the parent brand is relatively small, Hence, the retailer 1’s over- rium wholesale price, retail prices, and selling quantities of the parent
all profit decreases. Otherwise, the retailer 1’s overall profit in- brand and sub brand are as follows:
creases with λ2 , because the wholesale price reduction for the par-    3 2   
a1 6λ1 λ2 −2λ22 +8 −a2
λ1 λ2 +3λ21 λ2 +2λ1 λ22 + 2 +4λ2
ent brand dominates the negative social influence from the sub wO1 =   ,
brand. 2 λ31 λ2 +6λ1 λ2 − λ22 +8
As λ2 increases, the positive social influence becomes stronger    
and retailer 2 always benefits from the enlarged profit margin of 2a1 λ31 λ2 +λ21 +5λ1 λ2 −λ22 +6 −a2 λ41 λ2 +λ31 +4λ21 λ2 +6λ1 +2λ2
pO1 =  3  ,
sub brand, even though the selling quantity of the sub brand is 2 λ1 λ2 +6λ1 λ2 −λ22 +8
not always increasing with λ2 .
     
Corollary 5 compares the equilibrium decisions and profits of 2a1 λ21 λ2 + 2λ1 + λ2 + a2 λ21 λ22 − 2 + 7λ1 λ2 + 8
the supply chain players under brand extension with different re- O
p2 =   ,
tailers to the benchmark. 2 λ31 λ2 + 6λ1 λ2 − λ22 + 8

Corollary 5. (a) wD < wN , pD1 < pN , qD < qN .  

1 1 1 1 1 λ21 + 2 (2a1 + a2 (λ2 − λ1 ))
(b) There exist thresholds K6 , K7 and K8 such that when λ1 > qO1 =  3  ,
K6 , λ2 > K7 , a2 < K8 , πm
a D < π N ; otherwise, π D ≥ π N .
m m m 2 λ1 λ2 + 6λ1 λ2 − λ22 + 8
1
 
(c) πrD1 < πrN . 2a1 (λ2 − 2λ1 ) + a2 λ31 λ2 + 2λ21 + 3λ1 λ2 + 8
O
q2 =   .
Corollary 5 shows that under the brand extension with different 2 λ31 λ2 + 6λ1 λ2 − λ22 + 8
retailers, the manufacturer and retailer 1 lower the parent brand’s
wholesale price and retail price to mitigate the negative influence Substituting the equilibrium results of Proposition 4 into profit
of the sub brand sales, as compared to the benchmark scenario of functions (8 and 9), we can obtain the equilibrium profits of the
no sub brand. However, the price mitigation effect is still domi- manufacturer and retailer as follows:
 
nated by the social influence, and the parent brand’s sales is lower 4a21 + 4a1 a2 (λ2 − λ1 ) + a22 λ31 λ2 + λ21 + 4λ1 λ2 + 8
than the benchmark. π =
O
m   ,
4 λ31 λ2 + 6λ1 λ2 − λ22 + 8
When the social influence is strong enough (i.e., λ1 and λ2 are
a
large) and the relative market potential a2 is small, the manufac-  
1 λ21 + 2 2 (λ1 λ2 + 1 )(2a1 + a2 (λ2 − λ1 ))2
turer’s profit gain from the small sub brand market is dominated π =
O
r   .
by the profit loss in the parent brand, and its overall profit un- 4 λ31 λ2 + 6λ1 λ2 − λ22 + 8 2
der brand extension is lower than the benchmark. Otherwise, the Corollaries 6 and 7 discuss the impacts of market potentials and
manufacturer’s profit under brand extension is higher. Obviously, social influences on the supply chain players’ equilibrium profits.
compared to the benchmark, the retailer 1’s profit shrinks under
brand extension, due to the negative social influence from the sub Corollary 6. (a) πm
O and π O increase with a .
r 1
brand’s sales. (b) πm
O increases with a , and π O decreases with a .
2 r 2
Note that if there is no social influence between the parent
Corollary 6 shows that the impacts of the market potentials on
brand and sub brand (i.e., λ1 = λ2 = 0), the wholesale price, retail
the profits of the manufacturer and retailer are similar to those
price and selling quantity of the parent brand remain unchanged,
in Corollary 3, since the parent brand and sub brand are sold by
and the manufacturer’s profit increases while the retailer 1’s profit
different firms to the end consumers under models D and O.
remains unchanged, as compared to the benchmark scenario of no
brand extension. Corollary 7. (a) πmO decreases with λ .
1
< K9 , πrO in-
a2
(b) There exists a threshold K9 such that when a1
3.5. Model O: brand extension with direct selling creases with λ1 ; otherwise, πrO decreases with λ1 .
2λ51 +14λ31 +36λ1
2λ31 +12λ1
, πm
a2 O first decreases
(c) When < ≤
Under model O, the manufacturer extends the brand line, and λ41 +6λ21 +16
2λ61 +13λ41 +34λ21 +48 a1
2λ3 +12λ
and then increases with λ2 ; when a2 > 4 1 2 1 , πm
directly sells the low-end sub brand to end consumers. In reality, a O increases with
1 λ1 +6λ1 +16
many companies extend their low-end sub brands through the di-
rect channel (or online channel). For example, Coach sells its high- λ2 ; otherwise, πmO decreases with λ2 .
a2
end products through offline stores and sells low-end products (d) There exists a threshold K10 such that when K10 < a1 ≤
through the online channel (i.e., Coach Outlet). Besides, the famous 2λ31 +4λ1
, πrO first decreases and then increases with λ2 ; when
a2
>
liquor company Sichuan Swellfun, in addition to selling its high- λ41 +2λ21 +8 a1
2λ31 +4λ1
end liquor brand “Swellfun” in the traditional channel, extends the , πrO increases with λ2 ; otherwise, πrO decreases with λ2 .
λ41 +2λ21 +8
brand line and creates the low-end sub brand “SwellShangpin” for
the online channel. Corollary 7 shows that as the negative social influence λ1 in-
The decision sequence under model O is as follows. First, the creases, the manufacturer’s profit shrinks. To mitigate the intensi-
manufacturer determines the wholesale price w1 . Then, the retailer fied negative influence, the manufacturer could either raise the re-
and manufacturer simultaneously determine the retail prices p1 tail price of the sub brand to suppress its sales or lower the whole-
and p2 . The profit functions of the manufacturer and retailer are sale price for the parent brand to support its development, both of
as follows: which hurt the manufacturer’s profitability.
As λ1 increases, the negative influence of sub brand sales on
πm = w1 (a1 − p1 − λ1 q2 ) + p2 (a2 − p2 + λ2 q1 ), (8)
the retailer’s parent brand becomes more significant. However,
the manufacturer would lower the wholesale price for the parent
πr = ( p1 − w1 )(a1 − p1 − λ1 q2 ). (9) brand to relieve the negative social influence, leading to the de-
creased cost for the retailer. Therefore, the increase of λ1 has a
By backward induction, we can get the equilibrium results two-fold effect on the retailer. When a2 /a1 is relatively small, the
which are summarized in the following proposition. cost reduction benefit dominates the negative social influence, and

7
H. Song, H. Duan, S. Deng et al.
the retailer’s profit increases in λ1 ; when a2 /a1 is relatively large,
the negative social influence dominates, and the retailer’s profit
decreases in λ1 .
Similarly, the increase of λ2 has a two-fold effect on the manu-
facturer who gains a higher profit from the sub brand, but a lower
profit from the parent brand. When a2 /a1 is relatively large, the
sub brand market is very important for the manufacturer. As λ2
increases, the manufacturer’s profit gain from the sub brand dom-
inates its profit loss in the parent brand, and its overall profit in-
creases. On the contrary, when a2 /a1 is relatively small, the sub
brand market is less important. The manufacturer’s profit loss in
the parent brand dominates and its overall profit decreases with
λ2 . When a2 /a1 is in a moderate range, at the initial growing stage
of λ2 , the profit loss in the parent brand is more significant, and
the total profit of the manufacturer first decreases. When λ2 grows
to a certain level, however, the manufacturer’s profit gain from the
sub brand market dominates, leading to the increasing total profit
of the manufacturer.
As λ2 increases, the retailer faces a stronger social influence
from the sub brand. However, the manufacturer would raise the
sub brand’s retail price and concede in the parent brand’s whole-
sale price to mitigate the intensified social influence, which is ben-
eficial to the retailer. When a2 /a1 is relatively large, the mitigation
measures from the manufacturer are very significant and domi-
nate the negative social influence. Therefore, the retailer’s profit in-
creases with λ2 . When a2 /a1 is relatively small, however, the neg-
ative social influence dominates and the retailer’s profit decreases
with λ2 . When a2 /a1 is in a moderate range, the retailer’s profit
first decreases and then increases with λ2 .
Corollary 8 compares the equilibrium decisions and profits of
the supply chain players under brand extension with direct selling
to the benchmark.
Corollary 8. (a) wO
1
< wN
1
, pO1 < pN
1
. (d) There exists a threshold K16 such that when
−λ31 λ2 +4λ21 −6λ1 λ2 +λ22
(b) When
a2
> , qO < qN ; otherwise, qO ≥ qN .
a1 2λ31 −2λ21 λ2 +4λ1 −4λ2 1 1
(c) There exist thresholds K11 and K12 such that when λ2 > K11
and a2 < K12 , πm
O < π N ; otherwise, π O ≥ π N .
a 1
m m m
1
(d) There exists a threshold K13 such that when
a2
a1
πrN ; otherwise, πrO ≥ πrN .
Corollary 8 shows that similar to Corollary 5, the manufacturer
and retailer would lower the wholesale price and retail price of
the parent brand to mitigate the negative influence from the sub
brand, as compared to the benchmark scenario of no brand exten-
sion. Different from Corollary 5, when a2 /a1 is relatively small, the
selling quantity of the parent brand is higher under brand exten-
sion because the negative influence from the sub brand is dom-
inated by the reduction of wholesale price for the parent brand.
When a2 /a1 is relatively large, however, the selling quantity of the
parent brand is lower under brand extension since the negative so-
cial influence dominates.
Under brand extension with direct selling, the manufacturer
earns some additional profits from the sub brand. However, the
manufacturer needs to lower the wholesale price for the parent
brand to mitigate the negative social influence, leading to the de-
creased profit from the parent brand. When λ2 is relatively large
and a2 /a1 is relatively small, the negative social influence dom-
inates the additional profit from the sub brand, and the man-
ufacturer’s overall profit is lower under brand extension. Other-
wise, the manufacturer obtains a higher profit as compared to the
benchmark scenario of no brand extension.
When a2 /a1 is relatively large, the sub brand market causes sig-
nificant social influence on the parent brand’s sales. In this case,
the manufacturer’s brand extension hurts the retailer who focuses
on the high-end parent brand market. Otherwise, the retailer’s
Omega 110 (2022) 102626
profit is higher under brand extension due to the manufacturer’s
concession in wholesale price.
Note that if there is no social influence between the parent
brand and sub brand (i.e., λ1 = λ2 = 0), the wholesale price, retail
price and selling quantity of the parent brand remain unchanged,
and the manufacturer’s profit increases while the retailer’s profit
remains unchanged, as compared to the benchmark scenario of no
brand extension.
4. Comparisons of different models
In Section 3, we derive the equilibrium results for the three
models, i.e., brand extension with the same retailer, brand exten-
sion with different retailers, and brand extension with direct sell-
ing. We also analyze the impacts of market potentials and social
influences on the equilibrium decisions and profits, and compare
them to the benchmark scenario. In this section, we further com-
pare the three brand extension models and study the impacts of
channel structures on the supply chain decisions and profits.
4.1. Comparison between S and D
The key difference between models S and D is whether the
parent brand and the sub brand are sold by the same retailer or
two different retailers. Proposition 5 compares the equilibrium de-
cisions and profits under the two models.
Proposition 5. (a) wD < wS1 , wD > wS2 , pD1 < pS1 .
1 2
(b) There exists a threshold K14 such that when
a2
> K14 , pD2 > pS2 ;
a1
otherwise, pD2
≤ pS2 .
a2
(c) There exists a threshold K15 such that when a1 > K15 , qD S
1 > q1 ;
otherwise, qD
1≤ qS1 .
a2
a1 > K16 , qD
2
< qS2 ;
otherwise, qD
2
≥ qS2 .
1 1
(e) There exist thresholds K17 , K18 and K19 such that when λ2 >
K17 , λ1 < K18 , a2 < K19 , πm
D < π S ; otherwise, π D ≥ π S .
a
m m m
(f) πrD1 < πrS .
> K13 , πrO <
Proposition 5 shows that under model D, the wholesale price
for the parent brand is lower while the wholesale price for the
sub brand is higher, as compared to model S. The main reason is:
The manufacturer and retailer have the same profit goal and ex-
pect to balance the profits from both parent and sub brands under
model S. However, there is a divergence of goals between the man-
ufacturer and retailer under model D. Besides, the competition be-
tween two retailers under model D amplifies the social influence.
As a result, the manufacturer lowers the wholesale price for the
parent brand and increases the wholesale price for the sub brand
to mitigate the social influence. With the reduction of wholesale
price, the parent-brand retailer under model D also lowers the re-
tail price, as compared to model S.
When the relative market potential (i.e., a2 /a1 ) is large, the
wholesale price offered by the manufacturer for the sub brand un-
der model D is significantly higher as compared to model S. As a
result, the retail price of the sub brand is higher, and the selling
quantity of the sub brand is lower. The parent brand’s sales, in this
case, is higher due to the softened social influence. When a2 /a1
is relatively small, however, the wholesale price effect is not very
significant, and the retailer 2 (i.e., the sub-brand retailer) will com-
pete aggressively by reducing the retail price of the sub brand. As
a result, the sub brand’s sales increases while the parent brand’s
sales decreases, as compared to model S.
As discussed above, the manufacturer’s suppression on the sub
brand is more significant under model D, as compared to model S.
When λ2 is relatively large, and λ1 and a2 /a1 are relatively small,
8
H. Song, H. Duan, S. Deng et al.
Fig. 2. The comparisons of the manufacturer’s profit under models S and D.
the negative social influence from the sub brand is not very se-
vere, and the above suppression behavior under model D is ac-
tually harmful to the manufacturer. In other cases, the manufac-
turer gets a higher profit under model D. The retailer’s profit under
model D is obviously lower than that under model S.
Next, we use numerical experiments to illustrate the impacts of
social influences and market potentials on the comparison of the
manufacturer’s profit. The results are shown in Fig. 2, where we
set λ1 = 0.65 in (a) and λ2 = 0.1 in (b).
Fig. 2 shows that compared to model S, the manufacturer could
gain more profits under model D in most cases, because the nega-
tive social influence λ1 is larger than the positive social influence
λ2 under assumption, and the manufacturer would set a higher
wholesale price for the sub brand to control the social influence
under model D, which is beneficial to the manufacturer in most
cases. Only when λ2 is very close to λ1 (i.e., λ2 > K17 , λ1 < K18 )
a
and the sub brand market is not important (i.e., a2 < K19 ), the
1
manufacturer’s profit is higher under model S.
Note that if there is no social influence between the parent
brand and sub brand (i.e., λ1 = λ2 = 0), the wholesale price, retail
price, selling quantity of the parent brand, and the manufacturer’s
profit remain unchanged under models S and D. But the retailer’s
profit is lower under model D.
4.2. Comparison between S and O
Under model S, the same retailer sells both the parent and sub
brands. Under model O, the sub brand is directly sold by the man-
ufacturer to the end customers. Proposition 6 compares the equi-
librium decisions and profits of supply chain players under models
S and O.
Proposition 6. (a) wO < wS1 , pO1 < pS1 , pO2 < pS2 , qO > qS1 , qO > qS2 .
1 1
(b) There exist thresholds K20 and K21 such that when λ2 >
K20 , a2 < K21 , πm
O < π S ; otherwise, π O ≥ π S .
a
1 m m m
> K22 , πrO < πrS ;
a2
(c) There exist a threshold K22 such that when a1
otherwise, πrO ≥ πrS .
Proposition 6 (a) shows that the wholesale price and retail
prices are lower, but the selling quantities are higher under model
O than under model S. The main reason is: compared to model
S, directing selling of the manufacturer eliminates the double
marginalization effect of the sub brand, and leads to a lower re-
tail price and a higher sales under model O. Due to the intensified
social influence from the low-end market, the manufacturer and
retailer needs to lower the wholesale price and retail price of the
parent brand, which boosts the sales to high-end customers under
model O.
Omega 110 (2022) 102626
When the social influence λ2 is large and the relative market
potential a2 /a1 is small, the sub brand market is less important for
the manufacturer, but causes significant influence on the parent
brand, especially under model O. In this case, the manufacturer’s
overall profit is lower, as compared to model S. In other cases, the
manufacturer gets a higher profit from direct selling, which elimi-
nates the double marginalization effect of the sub brand.
When a2 /a1 is relatively large, the retailer gets a lower profit
from model O, where the retailer only sells the parent brand which
is significantly hurt by the manufacturer’s direct selling. Otherwise,
when a2 /a1 is relatively small, the negative influence is not so sig-
nificant, and the retailer benefits from the wholesale price reduc-
tion under model O.
Next, we use numerical experiments to illustrate the impacts
of social influences and market potentials on the comparisons of
the manufacturer’s and retailer’s profits. The results are shown in
Fig. 3, where we set λ1 = 0.65 in (a, c) and λ2 = 0.1 in (b, d).
Fig. 3 (a) and (b) shows that compared to model S, the man-
ufacturer could gain more profits under model O in most cases,
because direct selling could help to eliminate the double marginal-
ization effect of the sub brand. On the contrary, Fig. 3 (c) and (d)
indicates that the retailer could gain more profits under model S in
most cases, due to the benefit from selling two brands at the same
time. Furthermore, given λ2 , as λ1 increases, the negative social
influence becomes more significant. Under model O, the manufac-
turer needs to make concession in wholesale price for the parent
brand, which is harmful to the manufacturer’s profit. Therefore, the
manufacturer is more likely to prefer model S as λ1 increases. On
the contrary, the retailer is more likely to prefer model O with the
reduction of wholesale price from the manufacturer.
Note that if there is no social influence between the parent
brand and sub brand (i.e., λ1 = λ2 = 0), compared to the model S,
the wholesale price, retail price and selling quantity of the parent
2 brand remain unchanged, and the retail price of the sub brand de-
creases but the selling quantity increases under model O. Further-
more, the manufacturer’s profit is higher but the retailer’s profit is
lower under model O.
4.3. Comparison between D and O
Under model D, the parent brand and sub brand are sold by
two different retailers to the end customers. Under model O, the
manufacturer directly sells the sub brand to the low-end market.
Proposition 7 compares the equilibrium decisions and profits of
supply chain players under models D and O.
Proposition 7. (a) wD 1
> wO1
, pD1 > pO1 .
a2
(b) There exists a threshold K23 such that when a1 > K23 , pD2 > pO2 ;
otherwise, pD2 ≤ pO2 .
9
H. Song, H. Duan, S. Deng et al. Omega 110 (2022) 102626

Fig. 3. The comparisons of profits under models S and O.

a2
(c) There exists a threshold K24 such that when a1 > K24 , qD O
1 > q1 ;
ket is less important. The manufacturer would raise the retail price
otherwise, qD
≤ qO . of the sub brand to suppress the negative social influence un-
1 1
a2 der model O, leading to a lower selling quantity of the sub brand
(d) There exists a threshold K25 such that when a1 > K25 , qD
2
< qO
2
;
and a higher selling quantity of the parent brand, as compared to
otherwise, ≥qD qO .
2 2 model D.
> K26 , πm
a2 D <
(e) There exists a threshold K26 such that when a1 For the manufacturer, when a2 /a1 is relatively large, the manu-
πmO ; otherwise, πmD
≥ πmO . facturer would benefit from direct selling the sub brand and obtain
> K27 , πrD1 >
a2
(f) There exists a threshold K27 such that when a1 higher profits under model O. On the contrary, when a2 /a1 is rela-
πrO ; otherwise, πrD1 ≤ πrO . tively small, the manufacturer’s profit under model O is lower than
under model D, due to the intensified social influence.
Under model O, the manufacturer directly sells the sub brand For the retailer, when a2 /a1 is relatively large, direct selling un-
to the customers and eliminates the double marginalization effect, der model O significantly intensifies the negative social influence
which causes negative influence on the sales of parent brand. To on the parent brand’s sales, leading to a lower profit of the retailer,
this end, the manufacturer and retailer lower the wholesale price as compared to model D. When a2 /a1 is relatively small, however,
and retail price to help the parent brand. Furthermore, when the the retailer’s profit is higher under model O, where the social influ-
ratio of the market potential (i.e., a2 /a1 ) is relatively large, the sub ence is not significant and the manufacturer concedes in wholesale
brand is relatively important. Without the double marginalization price for the parent brand.
effect under model O, the manufacturer is able to lower the re- Next, we use numerical experiments to illustrate the impacts
tail price of the sub brand, as compared to model D. As a result, of social influences and market potentials on the comparisons of
the selling quantity of the sub brand under model O is higher. In the manufacturer’s and retailer’s profits. The results are shown in
this case, the negative social influence on the parent brand’s sales Fig. 4, where we set λ1 = 0.65 in (a, c) and λ2 = 0.1 in (b, d).
becomes stronger, resulting in the decrease of the parent brand’s Fig. 4 shows that compared to model D, the manufacturer could
sales. When a2 /a1 is relatively small, however, the sub brand mar- gain more profits under model O in most cases. Furthermore, given

10
H. Song, H. Duan, S. Deng et al. Omega 110 (2022) 102626

Fig. 4. The comparisons of profits under models D and O.

λ1 , as λ2 increases, the manufacturer and retailer are more likely (b) When
a2
a1 > K14 , pO2 < pS2 < pD2 ; when
a2
a1 < K23 , pD2 < pO2 < pS2 ;
to prefer model O, because the manufacturer would benefit from a
when K23 < a2 < K14 , pO2 < pD2 < pS2 .
1
direct selling of the sub brand, and the retailer would benefit from a a2
(c) When a2 < K15 , qD S O
1 < q1 < q1 ; when > K24 , qS1 < qO < qD
1;
wholesale price reduction for the parent brand. However, given λ2 , 1 a1 1
a2 S D O
as λ1 increases, the negative social influence becomes stronger. In when K15 < a < K24 , q1 < q1 < q1 .
1
a a2
this case, the manufacturer is more likely to prefer model D, where (d) When a2 > K16 , qD S O
2 < q2 < q2 ; when a1 < K25 , qS2 < qO
2
< qD
2;
1
the suppression of the sub brand sales is more successful. As λ1 a2 S D O
when K25 < a < K16 , q2 < q2 < q2 .
increases, the retailer is more likely to prefer model O when λ1 is 1
(e) There exist thresholds K28 , K29 , K30 , and K31 such that when
relatively small, because of the lower wholesale price for the par- a2
> K28 , model O is the best for the manufacturer; when λ2 >
a1
ent brand and insignificant social influence from the low-end mar-
K29 , λ1 < K30 , a2 < K31 , model S is the best for the manufacturer; oth-
a
ket. When λ1 further increases, the retailer prefers model D due to 1

the more effective control of the negative social influence.
Note that if there is no social influence between the parent
brand and sub brand (i.e., λ1 = λ2 = 0), compared to the model D,
the wholesale price, retail price and selling quantity of the parent
brand remain unchanged, and the retail price of the sub brand de-
creases but the selling quantity increases under model O. Further-
more, the manufacturer’s profit is higher but the retailer’s profit
remains unchanged under model O.
4.4. Comparison among S, D and O
We are interested in the best structure for the manufacturer
and retailer. According to Corollary 2, both the manufacturer and
retailer gain higher profits under model S as compared to the
benchmark scenario of no sub brand. Therefore, it is impossible
that model N is the best structure. Proposition 8 compares the
equilibrium decisions and profits of supply chain players under
models S, D and O.
Proposition 8. (a) wO
1
< wD
1
< wS1 , pO1 < pD1 < pS1 .
erwise, model D is the best for the manufacturer.
a
(f) When a2 < K22 , model O is the best for the retailer; otherwise,
1
model S is the best for the retailer.
(g) The total profit of the manufacturer and retailers is the highest
under model O.
According to Propositions 5–7, we know that model O has the
most significant negative influences on the parent brand’s sales,
while model S has the least. To mitigate the social influence, the
manufacturer needs to lower the wholesale price for the parent
brand. The stronger the social influence, the lower the whole-
sale price would be for the parent brand. As a result, the whole-
sale price for the parent brand is the lowest under model O, and
highest under model S. Affected by the upstream wholesale price,
the retail price of the parent brand follows the same relation-
ship. Similarly, it is easy to obtain Proposition 8 (b)–(d) based on
Propositions 5–7, and the discussion is thus omitted here.
Proposition 8 (e) shows that there is no dominant extension
structure for the manufacturer. Specifically, when the ratio of the
market potential a2 /a1 is relatively large, compared to the other
two brand extension structures, the manufacturer obtains the high-
est profits from direct selling under model O. When λ2 is relatively

11
H. Song, H. Duan, S. Deng et al.
Fig. 5. The comparisons of the manufacturer’s profit among models S, D and O.
Fig. 6. The comparisons of the retailer’s profit among models S, D and O.
large, and λ1 and a2 /a1 are relatively small, the negative social in-
fluence is not significant, and the manufacturer gains the highest
profits under model S where the sub brand is not suppressed seri-
ously. Otherwise, model D is the best for the manufacturer.
For the retailer, when a2 /a1 is relatively small, the retailer gains
the highest profits under model O among the three brand exten-
sion structures, because of the lowest wholesale price for the par-
ent brand. When a2 /a1 is relatively large, the profit from the low-
end market is attractive. In this case, selling both the parent and
sub brands is the optimal choice for the retailer.
Proposition 8 (g) shows that model O is the best for the total
profit of the manufacturer and retailers. Under model O, the direct
selling of the manufacturer eliminates the double marginalization
of the sub brand. Moreover, since the wholesale price for the par-
ent brand is also the lowest, model O also alleviates the double
marginalization of the parent brand. That’s why model O brings
the highest total profit for the manufacturer and retailers.
Next, we use numerical experiments to illustrate the impacts
of social influences and market potentials on the comparisons of
the manufacturer’s and retailer’s profits. The results are shown in
Figs. 5 and 6. Fig. 5 shows that there is no dominant extension
structure for the manufacturer. However, compared to the other
two brand extension structures, the manufacturer gains more prof-
its under model O in most cases. Fig. 6 indicates that for the re-
tailer, although there is no dominant extension structure, models S
and O are better than model D. It implies that the retailer doesn’t
want the manufacturer to extend the brand line through a new re-
12
Omega 110 (2022) 102626
tailer, even if direct selling of the manufacturer causes significant
negative influence on the parent brand’s sales.
The results in Proposition 8 and Fig. 5 suggest that when choos-
ing the channel structure for the sub brand, the manufacturer
should consider the following two important factors: the relative
market potentials and the social influences between the parent and
sub brands. As the market potential of the sub brand increases,
the manufacturer may switch from S to D and finally to O. As the
positive social influence increases, the manufacturer may switch
from D to S. However, as the negative social influence increases,
the manufacturer may switch from S to D. Furthermore, the re-
sult that there is no dominant extension structure for the manu-
facturer is consistent with our observations in Chinese liquor in-
dustry: Moutai extends the brand line, and distributes sub brands
through the same retailer that sells the parent brand. However,
other famous liquor companies (such as Wuliangye, Luzhoulaojiao,
and Swellfun) sell sub brands through new retailers, or even di-
rectly sell sub brands to end consumers.
Note that if there is no social influence between the parent
brand and sub brand (i.e., λ1 = λ2 = 0), the comparisons among
models S, D, and O show that the wholesale price, retail price and
selling quantity of the parent brand remain unchanged, and model
O is the best for the manufacturer while model S is the best for the
retailer. Therefore, the social influences between the parent and
sub brands have significant impacts on the manufacturer’s and re-
tailer’s preferences about different channel structures.
H. Song, H. Duan, S. Deng et al.
Fig. 7. The manufacturer’s profits under quality investment.
5. Extensions
In this section, we discuss some extensions to the base model,
including the manufacturer’s quality investment and the channel
differentiation issue. We also study the case where λ2 > λ1 to
check the robustness of our main results.
5.1. Quality investment
In this section, we extend the base model to consider the sce-
nario where the manufacturer is able to invest in the quality of
the sub brand product. Following [56,57], we assume that the mar-
ket potential of the sub brand is a function of the sub brand’s
quality θ , and the manufacturer’s cost of quality investment is
cθ 2 (c > 0 ). To be more specific, the two brand’s demand func-
tions follow q1 = a1 − p1 − λ1 qe2 , q2 = a2 + θ − p2 + λ2 qe1 . In each
model, the manufacturer first determines the sub brand’s qual-
ity level θ , and the sequence of the other decisions remains un-
changed. We relegate the equilibrium results under models S, D,
and O to the appendix, and focus on the robustness check of our
main results. Proposition 9 compares the manufacturer’s and re-
tailer’s equilibrium profits with the benchmark scenario.
Proposition 9. When we consider the quality investment of the man-
ufacturer, compared to the benchmark of no sub brand, both the man-
ufacturer and retailer get higher profits under brand extension with
the same retailer. Under the other two extension structures, however,
the manufacturer’s profit or the retailer’s profit may be lower.
Fig. 7 (assuming λ1 = 0.2, c = 1, a1 = 1) shows that there is
no dominant structure for the manufacturer. When a2 is relatively
large, model O is the best for the manufacturer. When λ2 is rela-
tively large and a2 is relatively small, model S is the best for the
manufacturer. Otherwise, model D is the best for the manufacturer.
Fig. 8 (assuming λ1 = 0.2, λ2 = 0.05, c = 1, a1 = 1) shows that
the retailer prefers models S and O to model D. Furthermore, the
retailer’s profit from selling both the parent and sub brands may
be lower than that of selling the parent brand only. Fig. 9 (assum-
ing λ1 = 0.5, c = 1, a1 = 1, a2 = 4) investigates how the manufac-
turer’s and retailer’s profits vary as the positive social influence λ2
increases (using model S as an example). We observe that as the
positive influence of the parent brand on the sub brand’s sales in-
creases, the manufacturer’s and retailer’s equilibrium profits may
decrease under brand extension. The analytical and numerical re-
sults in this section show that the main results in our base model
are qualitatively robust when we consider the quality investment.
13
Omega 110 (2022) 102626
Fig. 8. The retailer’s profits under quality investment.
5.2. The case where λ2 > λ1
In this section, we relax the assumption about social influences
in the base model, and study the case where λ2 > λ1 . We relegate
the equilibrium results under models S, D, and O to the appendix,
and focus on the robustness check. The following proposition com-
pares the profits under brand extension to those in the benchmark
scenario.
Proposition 10. When λ2 > λ1 , compared to the benchmark of no
sub brand, both the manufacturer and retailer get higher profits under
brand extension with the same retailer. Under the other two extension
structures, however, the manufacturer’s profit or the retailer’s profit
may be lower.
The following proposition discusses the manufacturer’s and re-
tailer’s channel preferences.
Proposition 11. When λ2 > λ1 :
a
(a) There exist a threshold N1 such that when a2 > N1 , model O is
1
the best for the manufacturer; otherwise, model S is the best for the
manufacturer.
a
(b) There exist a threshold N2 such that when a2 < N2 , model O is
1
the best for the retailer; otherwise, model S is the best for the retailer.
Proposition 11 shows that there is no dominant channel struc-
ture for the manufacturer. Specifically, when the relative market
potential a2 /a1 is large, the manufacturer gets the highest profit
from direct selling under model O. When a2 /a1 is small, the man-
ufacturer gets the highest profit under model S. Note that when
λ2 > λ1 , the manufacturer’s profits under models S and O are al-
ways higher than that under model D: if the positive social effect
H. Song, H. Duan, S. Deng et al.
Fig. 9. The impacts of λ2 on the manufacturer’s and retailer’s profits under quality investment.
Fig. 10. The impacts of λ2 on the manufacturer’s and retailer’s profits when λ2 > λ1 .
λ2 is larger than the negative social effect λ1 , the manufacturer
benefits more from the softened channel competition under model
S and directly selling under model O, as compared to the model D.
When a2 /a1 is relatively small, the retailer gains the highest
profit under model O, where the wholesale price for the parent
brand is the lowest. When a2 /a1 is relatively large, the profit from
the sub brand becomes more attractive. In such case, selling both
the parent and sub brands under model S is the best for the re-
tailer.
Fig. 10, assuming λ1 = 0.35, a1 = 3, a2 = 1 in (a) and λ1 =
0.6, a1 = 3, a2 = 0.3 in (b), uses model D as an example to illus-
trate how the manufacturer’s and retailer’s profits vary as the pos-
itive social influence λ2 increases. We observe that as the positive
influence of the parent brand on the sub brand’s sales increases,
the manufacturer’s and retailer’s equilibrium profits may decrease
under brand extension. The analysis in this section shows that our
main results are qualitatively robust when λ2 > λ1 .
5.3. Channel differentiation
In the base model, we consider the brand differentiation be-
tween the parent and sub brands. In this section, we address the
issue of channel differentiation between the traditional and direct
channels. Some previous studies consider operational advantages
and disadvantages of the direct channel, as compared to the tradi-
tional channel [31,58–61], and a number of other studies investi-
gate the selling cost difference between the traditional and direct
channels [62–66]. Following [61,64], we assume that the demand
14
Omega 110 (2022) 102626
function of the sub brand under model O is q2 = ρ a2 − p2 + λ2 qe1 ,
where ρ (ρ > 0 ) measures customers’ willingness to switch to the
direct channel. We also assume that sales through the manufac-
turer’s direct channel incurs a unit selling cost of cs (cs > 0 ). We
relegate the equilibrium results under model O to the appendix,
and focus on the robustness check. The following proposition com-
pares the equilibrium profits under brand extension with those un-
der benchmark.
Proposition 12. When we consider channel differentiation, compared
to the benchmark of no sub brand, both the manufacturer and retailer
get higher profits under brand extension with the same retailer. Under
the other two extension structures, however, the manufacturer’s profit
or the retailer’s profit may be lower.
Proposition 13 shows the impacts of ρ on the manufacturer’s
and retailer’s equilibrium profits under model O.
Proposition 13. When we consider channel differentiation, under
model O, the manufacturer’s equilibrium profit is increasing in ρ ,
while the retailer’s equilibrium profit is decreasing in ρ .
Fig. 11 (assuming λ1 = 0.5, cs = 1, a1 = 1, ρ = 1.2) shows that
there is no dominant structure for the manufacturer: when a2 is
large enough, model O is the best for the manufacturer; otherwise,
model S or model D is the best for the manufacturer. Fig. 12 (as-
suming λ1 = 0.5, λ2 = 0.4, cs = 1, a1 = 1, ρ = 3) suggests that
model S is better than model D for the retailer. Furthermore, the
retailer’s profit from selling both the parent and sub brands (un-
der model S) may be lower than that of selling the parent brand
H. Song, H. Duan, S. Deng et al.
Fig. 11. The manufacturer’s profits under channel differentiation.
Fig. 12. The retailer’s profits under channel differentiation.
only (under model O). We observe from Fig. 13 (assuming λ1 =
0.5, cs = 1, a1 = 1, a2 = 2, ρ = 0.6) that as the positive influ-
ence of the parent brand on the sub brand’s sales increases, the
manufacturer’s and retailer’s equilibrium profits may decrease un-
der brand extension. The analytical and numerical analysis in this
section shows that the main results in our base model are qual-
itatively robust when we consider the channel differentiation be-
tween the traditional and direct channels.
Fig. 13. The impacts of λ2 on the profits under channel differentiation.
15
Omega 110 (2022) 102626
6. Conclusions
This paper studies a supply chain consisting of a manufacturer,
a retailer, a parent band and a sub brand. The manufacturer sells
the high-end parent brand through the retailer, and has the op-
tion of extending the parent brand to a sub brand to attract low-
end consumers under different channel structures. Although ex-
tending the parent brand to a sub brand helps the manufacturer
gain more profits in the low-end market, it will cause social influ-
ence between the parent brand and sub brand demands. To bet-
ter understand the impacts of social influences and channel struc-
tures on supply chain players, we study the following four mod-
els: no sub brand, brand extension with the same retailer, brand
extension with different retailers, and brand extension with direct
selling. Among them, the model of no sub brand is treated as the
benchmark. We derive the equilibrium results, and analyze the im-
pacts of market potentials and social influences on the equilibrium
decisions and profits. We find that as the negative influence of the
sub brand increases, the manufacturer’s equilibrium profit always
decreases, but the retailer’s equilibrium profit may increase under
brand extension with direct selling. As the positive influence in-
creases, the manufacturer’s and retailer’s equilibrium profits may
decrease under brand extension with different retailers (and direct
selling).
We also compare the equilibrium decisions and profits across
different models. We find that the wholesale price and retail price
for the parent brand are the lowest (highest) under brand ex-
tension with direct selling (with the same retailer). Furthermore,
H. Song, H. Duan, S. Deng et al.
compared to the benchmark of no sub brand, both the manufac-
turer and retailer obtain higher profits under brand extension with
the same retailer. Under the other two brand extension structures,
however, the manufacturer’s and retailer’s profits may be lower.
When the market potential of the sub brand is large enough, the
manufacturer prefers to sell the sub brand directly to the end cus-
tomers. Otherwise, it is better for the manufacturer to sell the sub
brand through the existing or a new retailer to better mitigate the
negative social influence. Interestingly, we show that the retailer’s
profit from selling both the parent and sub brands may be even
lower than that of selling the parent brand only.
In this paper, we concentrate on the case with only one sub
brand. In practice, the manufacturer may have several sub brands.
Besides, we assume complete information here while information
asymmetry is commonly observed in reality, and the manufac-
turer may have more information about the sub brand market
than the retailer. To this end, the problem of multiple sub brands
with asymmetric information is a promising future research direc-
tion. Besides, there may be several competing manufacturers sell-
ing substitutable products in the market. Moreover, we consider
a simple wholesale price contract in this paper, and it would be
interesting to discuss double marginalization and study the chan-
nel coordination issue. For example, we can study the impacts of
supply chain contracts, such as buy-back, quantity discount, and
revenue sharing contracts, on supply chain decisions and profits,
and design contracts that enable channel coordination or at least
achieve win-win outcomes. We leave these for future research ef-
forts.
CRediT authorship contribution statement
Haiqing Song: Supervision, Writing – review & editing.
Housheng Duan: Methodology, Investigation. Sijing Deng:
Methodology, Investigation. Jiayan Xu: Conceptualization, Writing
– review & editing.
Acknowledgments
The authors are grateful to the editors and two anonymous
referees for their valuable comments and suggestions that have
greatly improved this article. This research was supported by the
Humanities and Social Sciences Foundation of Ministry of Educa-
tion of China (20YJC630013), the National Natural Science Founda-
tion of China (72102077, 71802197, 71771222), and the Guangdong
Basic and Applied Basic Research Foundation (2021A1515011987).
Supplementary materials
Supplementary material associated with this article can be
found, in the online version, at doi:10.1016/j.omega.2022.102626.
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