Market targeting with social influences and risk aversion in a co-branding alliance

Abstract We consider a fast-fashion brand that cooperates with a luxury brand, jointly launching a co-branded product. The impacts of the co-branding on the two brands’ original product lines are uncertain, and each brand can be either risk averse or risk neutral. Consumers, driven by exclusivity or conformity, are classified as either snobs or conformists. The equilibrium retail price, quality investment, and investment support are derived. The optimal market-targeting strategy for the fast-fashion brand as marketer of the co-branded product, is identified. We show that the fast-fashion brand is willing to give up either the conformist or the snob market under certain conditions, even when it has sales in both markets. In addition, given a particular market-targeting strategy, the fast-fashion brand benefits from its own risk aversion if the cost of risk is low, but the luxury brand is always worse off; the luxury brand may benefit from the fast-fashion brand’s risk aversion, however, if the market-targeting strategy is changed. Both brands are worse off when the luxury brand is risk averse.