Spillovers and Other Externalities in Pharmaceutical Marketing - Innovation and Marketing in the Pharmaceutical Industry - page 671

In that setup, the efforts of a given franchisee on behalf of the franchisor will
enhance, say, the equity of the brand (or franchise) name; this in turn has a positive
impact on the sales of the second franchisee. The presence of this inter-linkage
(and being aware of it!) gives the second franchisee an incentive to lower its efforts
to enhance the brand name. Consequently, in equilibrium, both agents will lower
their efforts leading to the under-investment problem. See Lal ( 1990 ) for a formal
analysis on how to manage such franchisees; for other analyses of the under-
investment problem in a channel context, with distributors who do not have exclusive
territories, see Iyer ( 1998 ) and Desiraju ( 2004 ).
An analogous effect arises in R&D partnerships and among firms involved in a
co-marketing alliance. Amaldoss et al. ( 2000 ), for example, show that in a joint
product development alliance, each partner can free ride on the investments made
by the other partners, thereby leading to under-investment. Other research on R&D
alliances (for a review, see Veugelers 1998 ), too, shows that the presence of an
externality among the partners leads to lower R&D investments.
Similarly, consider a co-marketing alliance such as the one Sony formed with
McDonald's, Old Navy, ConAgra Foods and many other partners to promote the
movie Surf's Up. In such alliances, when one of the partners, say McDonald's, puts
forth effort to popularize Surf's Up, Sony enjoys a direct benefit. Now, Old Navy
gains when Sony's equity is enhanced and therefore, indirectly enjoys the impact of
that benefit. This latter effect can be seen, e.g., in Howard ( 1996 ) who notes that in
the context of a Disney-McDonald's tie-in promotion, when the movie's popularity
went up, the alliance's value to McDonald's went up; Simonin and Ruth ( 1998 ), too,
document an analogous relationship in an experimental context (see also Suh and
Park 2009 ).
Note that Yang et al. ( 2009 ) show the empirically estimated impact on a brand of
joining teams with varying levels of equity. Since the equity of a team goes up from
the efforts of the “other” members of the team, the entries in the table are indicative
of the varying magnitude of the indirect linkage under discussion. The individual
partners of an alliance typically do not account for such an inter-linkage while
deciding on their levels of investment (hence we refer to it as a spillover); this in
turn leads to overall under-investment in marketing efforts and affects the value of
the alliance. See Chennamaneni and Desiraju ( 2011 ) for details on the relative value
of alternative contractual agreements to manage such alliances.

23.2.2 Spillover Effects Under Umbrella Branding

Next, we turn to spillovers that may arise via consumers' interactions with branded
products. Marketing academics have addressed several dimensions of such spillovers
(e.g., Erdem 1998 ; Erdem and Sun 2002 ; Sullivan 1990 ; Balachander and Ghose 2003 ).
Spillover among products using the same “umbrella” brand name—for instance,
Yoplait regular yogurt (which was introduced into the market first) and Yoplait
nonfat yogurt; we'll refer to the regular product as the parent and the nonfat version
as the child—may arise as follows: Yoplait's marketing efforts, such as advertising,