European Journal of Operational Research 297 (2022) 301–318

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European Journal of Operational Research

journal homepage: www.elsevier.com/locate/ejor

Innovative Applications of O.R.

Market targeting with social influences and risk aversion in a

co-branding alliance
Qiao Zhang a,∗, Jing Chen b, Jun Lin a
a
School of Management, Xi’an Jiaotong University, Xi’an Shaanxi 710049, China
b
Rowe School of Business Dalhousie University, Halifax NS B3H 4R2, Canada

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

Article history: We consider a fast-fashion brand that cooperates with a luxury brand, jointly launching a co-branded
Received 29 July 2020 product. The impacts of the co-branding on the two brands’ original product lines are uncertain, and
Accepted 18 May 2021
each brand can be either risk averse or risk neutral. Consumers, driven by exclusivity or conformity,
Available online 25 May 2021
are classified as either snobs or conformists. The equilibrium retail price, quality investment, and invest-
Keywords: ment support are derived. The optimal market-targeting strategy for the fast-fashion brand as marketer
Game theory of the co-branded product, is identified. We show that the fast-fashion brand is willing to give up either
Co-branding the conformist or the snob market under certain conditions, even when it has sales in both markets. In
Social influences addition, given a particular market-targeting strategy, the fast-fashion brand benefits from its own risk
Risk aversion aversion if the cost of risk is low, but the luxury brand is always worse off; the luxury brand may bene-
Market-targeting strategy fit 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.
© 2021 Elsevier B.V. All rights reserved.

1. Introduction
Co-branding is a brand alliance strategy in which two or more
brands are involved in jointly launching a separate and unique
co-brand (Blackett & Board, 1999) with the product characteris-
tics that combine those of the cooperating brands (Park, Jun, &
Shocker, 1996). Co-branding is a marketing strategy and also an ad-
vertising campaign, as the success of one brand affects the success
of its partner brand. The strategy, which is popular in the fash-
ion industry (Oeppen & Jamal, 2014), can be effective in boosting
awareness, developing new markets (Bernazzani, 2020), reducing
costs, and providing value to loyal customers (Giles, 2020). H&M,
a fast-fashion brand, started its co-branded collection with Chanel
creative director Karl Lagerfeld in 2004. Since this successful co-
branding cooperation, H&M has launched one or more co-brands
each year with other luxury brands including Jimmy Choo, Versace,
and Marni (Oeppen & Jamal, 2014). This has initiated an upsurge of
co-branding with luxury brands (Okonkwo, 2016). UNIQLO, a fast-
fashion brand, has launched co-branded T-shirts with designers of
luxury brands, such as Alexander Wang, Tomas Maier (the creative
director of Bottega Veneta), and Kaws. Its co-branded collections
with Kaws were sold out in both off-line and online stores soon af-
∗
Corresponding author.
E-mail addresses: qiaozhang@xjtu.edu.cn (Q. Zhang), Jchen@Dal.Ca (J. Chen),
ljun@mail.xjtu.edu.cn (J. Lin).
ter launch. The trend can involve more than a simple combination
of logos, with some collaborations involving a joint improvement
of product design and quality. For example, the co-branded clothes
jointly launched by UNIQLO and designer J.W. Anderson in 2017
embody not only the designer’s investment in quality attributes
(such as design and appearance), but also UNIQLO’s investment in
fabric quality. The integration of the brands’ investments in appear-
ance and texture has contributed to the success of this co-branding
endeavor.
The fast-fashion brand in a co-branding alliance usually uses
this strategy to raise its perceived level of prestige, while the lux-
ury brand sees it as an opportunity to expand its consumer base
and brand awareness. Co-branding seems to be a win-win strategy
in this respect, but there have also been many co-branding fail-
ures. For instance, the co-branded collections by H&M and Kenzo
in 2016 received poor reviews for their exaggerated colors and
pattern designs, which disappointed fans of both brands. The co-
branded products of UNIQLO and J.W. Anderson in 2018 were also
not favored by consumers. The co-branding strategy presents po-
tential risks and challenges, and the negative feedback for one
brand may influence the other brand (Oeppen & Jamal, 2014; Si-
monin & Ruth, 1998). Moreover, in the fashion industry, the con-
sumer’s tastes and preferences, and the market environment are
usually dynamic, which increases the risk to the partners’ brands
in a co-branding alliance. Facing these uncertainties, brand man-
agers may have different risk preferences; they may be risk neutral

https://doi.org/10.1016/j.ejor.2021.05.022
0377-2217/© 2021 Elsevier B.V. All rights reserved.
Q. Zhang, J. Chen and J. Lin
or risk averse. A risk averse manager aims to pursue a lower vari-
ance of outcomes. The managers’ risk attitudes will significantly
impact operations and marketing decisions, and eventually influ-
ence revenues.
Fashion consumers usually express more concern about the
psychological benefits of co-branding than the functional benefits.
Depending on their behaviors, fashion consumers can be catego-
rized as snobs and conformists (Amaldoss & Jain, 2005a; Shen,
Qian, & Choi, 2017b). The former, driven by the psychology of ex-
clusivity, perceive that a product has a lower valuation if it is
widely consumed. The latter, driven by the psychology of con-
formity, are eager to buy a product that is popular in the mar-
ket. Snobs and conformists are known to coexist in luxury fash-
ion industry, and the corresponding exclusivity and conformity ef-
fects (known as social influences) represent universal human de-
sires (Tsai, Yang, & Liu, 2013). Consumers’ purchase decisions on a
co-branded product are commonly affected by these two social in-
fluences, as it carries with the two brand attitudes of both brands.
Specifically, fashion conformists are willing to buy the co-branded
product if it is popular, whereas fashion snobs are less willing to
buy, due to a lack of uniqueness caused by popularity. Social in-
fluences resulting from the distinct behaviors of the two consumer
groups present challenges for the participating brands in managing
the consumer portfolio.
In this paper, we aim to investigate the quality investment co-
operation and pricing decisions in a co-branding alliance with con-
sideration of risk preference and social influences. Specifically, we
will address the following research questions.
1. What are the optimal retail price, quality investment, and in-
vestment support strategies in a co-branding program?
2. How does a brand develop a market-targeting strategy in the
presence of a market divided into snobs and conformists?
3. How do the risk preferences of the two collaborating brands
and the social influences of the two groups of consumers impact
the co-branding alliance?
To address these research questions, we consider a fast-fashion
brand (Brand 1) who cooperates with a luxury brand (Brand 2)
to jointly launch a co-branded product. Investment in quality im-
provement is made jointly by the two brands in order to attract
more demands from the two consumer groups in the market:
snobs and conformists. In addition to this co-branding project, each
brand also has its original product line, which may be influenced
by the launch of the co-branding. The two brands may have differ-
ent attitudes to risk related to the dynamic tastes and preferences
of consumers and the market environment; the brands may be risk
neutral or risk averse. We derive the equilibrium retail price, qual-
ity investment, and market-targeting strategies for Brand 1, as well
as the quality investment support strategy for Brand 2, in the pres-
ence of social influences and risk preferences. The impacts of so-
cial influences and risk preferences on the equilibrium decisions
are further studied. We find that: first, Brand 1 is always willing
to give up either the conformist or the snob market under certain
conditions, although it is able to have demand in both consumer
groups. Brand 2 may have different market-targeting preferences.
Second, when Brand 1 is risk neutral, all equilibrium decisions in-
crease with conformity effect, but decrease with exclusivity effect.
When Brand 1 is risk averse and the degree of risk aversion is
above a specific threshold, however, Brand2s investment support
shows the opposite trend. Interestingly, Brand 1 is more likely to
raise the retail price with high risk aversion, due to uncertainty
related to co-branded sales. Third, Brand 1 benefits from its risk
aversion under a low cost of risk, but Brand 2 is always worse
off. Brand2s risk aversion is detrimental to both brands. This re-
sult differs from those of earlier researches because we consider
a different risk source (uncertain impact of co-branding sales) and
contract type (cost- and revenue-sharing contract). Finally, we find
302
European Journal of Operational Research 297 (2022) 301–318
that Brand 2 may benefit from Brand1s risk aversion only when
market-targeting strategy switches.
The contributions of this work are as follows. First, an ana-
lytical model is developed to investigate the game problem in a
co-branding alliance, and this offers some new insights on co-
branding. Second, we consider the uncertainties in the co-branding
alliance, and the two brands’ different risk preferences into ac-
count. Specifically, we assume that the impacts of co-branding
sales on the profits of the original product lines are uncertain, tak-
ing this may provide valuable managerial insights. Third, social in-
fluences are introduced into the co-branding project. The impact
of social influence in the market for the fashion industry is impor-
tant and widespread but usually ignored in co-branding research.
Our work complements the existing research on co-branding and
provides insights into market-targeting strategies for co-branding
participants.
The remainder of this work is organized as follows:
Section 2 reviews the related literature and Section 3 describes
the model. Section 4 presents the equilibrium solutions when the
two brands are risk averse, and Section 5 gives the equilibrium
solutions when either brand (or both two brands) is (are) risk
neutral. The impacts of risk preference on the expected profits
of the two brands are analyzed in Section 6. Numerical stud-
ies are presented to provide additional insights in Section 7.
Sections 8 and 9 provide extensions and conclusions, respectively.
All proofs are presented in the Appendix.
2. Literature review
This study relates to three research streams: co-branding strat-
egy, social influences, and mean-variance risk analysis.
Co-branding is a marketing strategy in which two or more
brands are simultaneously presented to consumers; this strategy
is also referred to as brand alliance (Kupfer, Pähler vor der Holte,
Kübler, & Hennig-Thurau, 2018), ingredient branding (Leuthesser,
Kohli, & Suri, 2003), and joint branding (Levin & Levin, 20 0 0). The
value of the partnership is deemed to be greater than the value
of the individual parts from a financial point of view, and may
positively affect both participating brands. It has been shown that
co-branding can positively influence consumer attitudes and re-
sponses to the participating brands (Levin & Levin, 20 0 0; Simonin
& Ruth, 1998; Washburn, Till, & Priluck, 2004), but co-branding
does not always have a positive spillover effect. As pointed out by
Helmig, Huber, and Leeflang (2008), co-branding may negatively
affect the associated brands if either the combination of the two
brands does not fit or if negative perceptions on one brand trans-
fer to the other brand. Evidence suggests that negative feedback
or spillover is more likely to occur for high-end products such as
luxury fashion brands (Völckner & Sattler, 2006; Wang, Soesilo,
Zhang, & Di Benedetto, 2012). Many empirical studies have ex-
plored the positive and negative effects of co-branding (Geylani,
Inman, & Hofstede, 2008; Votola & Unnava, 2006), especially in
the fashion industry. For instance, Oeppen and Jamal (2014) use
in-depth interviews with brand managers to investigate the nature
of co-branding in the fashion industry. They indicate that coopera-
tion, with short-term availability with a mass-market brand, pro-
tects the luxury brand from dilution or cannibalization of sales,
and generates consumer interest in a new market through the
mass-market retailer. Mrad, Farah, and Haddad (2019) explore the
impacts of co-branding between a luxury brand and a fast-fashion
brand on consumer reactions to the luxury brand. They find that
the co-branding enhances luxury brand awareness, but may exert
a negative impact on the overall perception of luxury brand. All of
the above studies are from the empirical perspective.
A few mathematical studies have also been done. Geylani et al.
(2008) propose an analytical framework to investigate the effects
Q. Zhang, J. Chen and J. Lin
of the co-branding on the images of the partner brands. Their re-
sults show that co-branding may improve the value of the brand
attributes, while also increasing the uncertainty that is associ-
ated with the brands. In a luxury and fast fashion co-branding
alliance, Shen, Choi, and Chow (2017a) discuss the brand perfor-
mance under profit-sharing, fixed-royalty, and mergers schemes.
They show that the associated brands perform best under the
mergers scheme. The analytical models for studies in co-branding
are limited. Our study analytically discusses game problem be-
tween a fast-fashion brand and a luxury brand in a co-branding
alliance.
Social influence refers to how an individual’s decisions are as
yet impacted by others when they exchange and share informa-
tion with social network members. As a consumer, an individ-
ual can update their expectations regarding the outcome of their
own choices as a result of activity inside their networks (Kim, Ra-
souli, & Timmermans, 2017). Here we consider two specific types
of social influence: exclusivity effect and conformity effect, which
are used to classify consumers as snobs or conformists, respec-
tively (Amaldoss & Jain, 2005a; Zheng, Chiu, & Choi, 2012). Snob
consumers are less prone to choose a product as the number of
its purchasers increases (Gao, Lim, & Tang, 2016; Thomas & Vin-
uales, 2017), while conformists have the opposite preference (Zhen,
Cai, Song, & Jang, 2019). Considering the two consumer groups
in the context of conspicuous consumption, Amaldoss and Jain
(2005a) propose a monopoly model to examine the impacts of ex-
clusivity and conformity on purchase decisions. They show that
the demand curve could be downward sloping under certain con-
ditions, and the profits of a monopolist increase with conformity
but decrease with exclusivity. Amaldoss and Jain (2005b) extend
the work of Amaldoss and Jain (2005a) to a competitive frame-
work. They show that exclusivity leads to higher prices and prof-
its, but conformity leads to an opposite result. Chiu, Choi, Dai,
Shen, and Zheng (2018) study the optimal consumer portfolio and
advertising-budget allocation in the presence of social influences,
and find that the optimal advertising strategy is to allocate all the
advertising budget to one group (snobs or conformists). Shen et al.
(2017b) consider a luxury fashion supply chain with one supplier
and one online retailer, providing differentiated services to dif-
ferent consumer groups (fashion leaders and followers). The im-
pacts of changes in demand are examined. They show that when
the change in demand is small, adjusting the retail price alone is
enough to maximize the channel profit, whereas adjusting both
the retail price and retail services are necessary when the demand
change is sufficiently large. In a supply chain with social influ-
ence, assuming that the manufacturer can obtain a private sig-
nal on uncertain demand, but the retailer cannot, Zhang, Chen,
and Zaccour (2020) explore the information preferences of chan-
nel members. They show that the manufacturer may benefit from
a no-information, a private-information, or an information-sharing
policy, depending on its market-targeting strategy, while the re-
tailer never benefits from acquiring the manufacturer’s informa-
tion. Other studies related to social influences include, for example,
Agrawal, Kavadias, and Toktay (2016), Amaldoss and Jain (2015),
and Argo and Dahl (2020). Our study focuses on the co-branding
partner’s strategic market-targeting strategy in the presence of so-
cial influence, and we find that the partner can strategically give
up either the conformist or the snob market under certain condi-
tions.
The mean-variance (MV) approach, proposed by Harry
Markowitz, is a ground-breaking theory of portfolio risk man-
agement in finance (Markowitz, 1959). Lau (1980) was the first to
apply the MV approach (mean-standard derivation) to inventory
management, and was followed by many other studies in risk
analysis in operations management, including price competition
in a mass customization supply chain (Choi, Ma, Shen, & Qi,
303
European Journal of Operational Research 297 (2022) 301–318
2019), ordering issues in a newsvendor model (Bai, Wu, & Zhu,
2019; Rubio-Herrero & Baykal-Gürsoy, 2020), quality investment
issues (Xie, Yue, Wang, & Lai, 2011), and supply chain coordination
problems (Zhuo, Shao, & Yang, 2018). Chiu and Choi (2016) review
recent developments in the MV approach in operations manage-
ment risk analysis. Our work also uses this method to analyze how
risk preference influences the operations and marketing decisions
of the partner brands in a co-branding project.
3. Model
We consider a fast-fashion brand such as H&M or UNIQLO (de-
noted with a subscript 1) that launches a co-branded product with
a luxury brand such as Chanel, Versace, or KENZO (denoted with a
subscript 2). Following practice, for the co-branding project in this
paper, Brand 1 as the producer of the co-branded product makes
quality investment and Brand 2 provides support in quality im-
provement or product design. For instance, UNIQLO and designer
J.W. Anderson jointly launched a series of co-branded clothes in
2017, with the designer investing in attributes such as design and
appearance, and UNIQLO making an investment in fabric quality.
The combination of their investments in appearance and texture
contributed to this success of the co-branded product. Thus, we
suppose that these two brands jointly carry out quality investment
to launch their product based on a cost- and revenue-sharing con-
tract. Specifically, Brand 1 decides on the quality investment (u)
and selling price ( p), and Brand 2 sets the investment support pro-
portion (φ ). Both brands share the co-branding profit based on a
given profit-sharing contract.
The co-branded product combines the attributes (and brand
history) of the two brands, so consumer’s social influence effects
are especially interesting. Two social influence effects are com-
monly observed in practice: conformity and exclusivity. These two
effects divide consumers in the market into two groups, con-
formists (C) and snobs (S). Conformists are willing to buy a product
when it is widely adopted by others, while snobs pursue exclusiv-
ity, and they dislike a product that is purchased by many other
consumers. The co-existence of conformists and snobs is widely
noted in the fashion luxury industry (Amaldoss & Jain, 2005a; Chiu
et al., 2018). The demands from conformists (Dc ) and snobs (Ds ) are
specified as follows:
D c = a c + θc u − p + β ( D c + D s ) , (1)
and
D s = a s + θ s u − δ p − b( D c + D s ) , (2)
where ai , i = {c, s} is basic demand for each group of consumer.
θi is quality investment effectiveness for consumer group i, mea-
suring the contribution of unit quality investment on the demand.
δ (0 < δ < 1) reflects that snobs are less sensitive to selling price
than conformists (see Zheng et al. (2012)). 0 < β < 1 and 0 < b < 1,
representing the levels of conformity and exclusivity effects, re-
spectively. A large β (b) means that conformists (snobs) are more
(less) likely to follow the other’s purchasing decisions. The total
demand in the market is D = Dc + Ds , which gives:
a c + a s − ( 1 + δ ) p + u ( θc + θs )
D(u, p) = , (3)
1+b−β
u ( θc + θs )
where p ≤ ac +as +1+ δ . Both linear additive and multiplicative
demands are widely used in the literature, but no general the-
ories or empirical evidence link product categories and demand
type in either academic or trade journals (Shi, Zhang, & Ru, 2013).
In this paper, therefore, similar to Shen et al. (2017b), we use de-
terministic and linear additive demands to well capture the inter-
independence of the two consumer groups, and simplify the solu-
tions, so that we can focus on developing managerial insights and
implications with analytical results.
Q. Zhang, J. Chen and J. Lin European Journal of Operational Research 297 (2022) 301–318

Following the studies in the literature (for example, De Gio-
vanni & Zaccour, 2019; Guo, Choi, & Shen, 2020; Zhang, Tang, Zac-
cour, & Zhang, 2019), the quality investment cost C (u ) is modeled
as a convex quadratic function that increases with u:
C ( u ) = u2 , (4)
which characterizes diminishing returns from the investment. The
total cost is shared by the two brands, with Brand 2 determining a
share (φ ) and Brand 1 keeping the rest (1 − φ ).
In addition to producing and selling this co-branded product,
each Brand j, where j = 1, 2, has its own product line, the profit
generated from which may be influenced by the launch of the
co-branded product. We use the profit change π j , which is as-
sumed to be closely related to the sales of the co-branded product
(D(u, p)), to represent the influence of the co-branding project on
Brand j’s original product line (as in Shen et al. (2017a)).
π j = ε j D(u, p), j = 1, 2, (5)
where ε j is a random variable following a distribution with a mean
of zero and a variance of σ j2 and D(u, p) is given in (3). This cap-
tures the uncertainty of the impacts of co-branding on a brand’s
original product line. For example, for the fast-fashion Brand 1, co-
branding with luxury Brand 2 may improve its brand value, but it
may cannibalize the market share of its original product line. For
Brand 2, co-branding with a low-end brand may hurt its brand im-
age, leading to a profit loss, but it can also expand its demand in
the low-end market. π j can also be referred to as the spillover
effect of launching the co-branded product, with impact being ei-
ther positive (π j > 0) or negative (π j < 0) (Geylani et al., 2008;
Shen et al., 2017a; Votola & Unnava, 2006).
Without loss of generality, we normalize the unit production
cost of the co-brand to zero. Thus, the gross profit from the co-
brand is pD(u, p), and this is shared by the two brands through
a preset profit-sharing contract, with Brand 2 receiving an exoge-
nously given percentage r, and Brand 1 receiving the rest (1 − r).
Thus, the profit functions of the two brands are given as:
π1 = (1 − r ) pD(u, p) − (1 − φ )u + π1 ,
2
(6)
follower. The sequence of events is as follows: in the first stage,
Brand 2 determines the quality investment support (φ ) for the co-
branded product. In the second stage, Brand 1 reacts and decides
on the quality investment (u) and the retail price ( p) for the co-
branded product. The notation used in the paper is summarized in
Table 1, some of which will be introduced later in this paper.
4. Equilibrium when both brands are risk averse
In this section, we focus on deriving the equilibrium for the
case in which both brands are risk averse (F = AA).
Following studies in the literature (for example, Chiu & Choi,
2016; Lau, 1980), we use mean-standard deviation (one mean-
variance (MV) method) to capture the risk preferences of the two
brands. We first derive the two sellers’ equilibrium decisions in
price ( pW F ), quality investment by Brand 1 (uW F ), and quality in-
vestment support by Brand 2 (φW F ), under Brand1s three market-
targeting strategies W = {B, S, C }. This follows studies in risk anal-
ysis in operations management (for example, Bai et al., 2019; Choi
et al., 2019; Choi et al., 2018). For j = 1, 2, the standard deviation
of Brand j’s profit is:
S[π j ] = D(u, p)σ j .
Then the mean-risk optimization objective function (U j ) for
Brand j is:
U j = E[π j ] − λ j S[π j ] = E[π j ] − λ j σ j D(u, p),
where λ j > 0 represents Brand j’s degree of risk aversion. A larger
λ j implies that Brand j is more risk averse. As in Chiu and
Choi (2016), U j is a classic objective function under the mean-risk
framework, and S[π j ] perfectly measures the risk as it is consistent
with the downside risk measure (Choi et al., 2019).
We define η j = λ j σ j as the cost of risk for Brand j, j = 1, 2. Un-
der the mean-risk framework, the optimization problem for F = AA
is given as:
max E[r pD(u, p) − φ u2 + ε2 D(u, p)] − η2 D(u, p)
φ
s.t. arg max E[(1 − r ) pD(u, p) − (1 − φ )u2 + ε1 D(u, p)] − η1 D(u, p)
u,p

and (8)
where D(u, p) is given in (3).
π2 = r pD(u, p) − φ u2 + π2 , (7)
In deciding quality investment and setting the price for
where π j is given in (5) and D(u, p) is given in (3). the co-branding in the market, Brand 1 has three possible
Facing uncertain impacts of the co-branding on its own product market-targeting strategies (W ), targeting both snobs and con-
line, each brand may have one of two risk preferences, either risk formists (B), targeting snobs only (S), or targeting conformists
averse (A) or risk neutral (N). In the literature (for example, Choi, only (C), where W = {B, S, C }. To derive meaningful explanations,
β +(βθs +(1+b)θc )u
Zhang, & Cheng, 2018), the follower in a manufacturer-retailer sup- we define k = b − δ (1 − β ), pmax
c = ac (1+b)+as1+ b+βδ
,
ply chain under a wholesale price contract is usually supposed
pmax
s = ac b−as (1−β )+(kbθc −(1−β )θs )u , p = min{ pmax
c , pmax
s }, and
to be risk sensitive, while the leader has the advantage in pric-
p̄ = max{ pmax
c , pmax }, where pmax and pmax are thresholds where
s c s
ing power, and is therefore less sensitive to risk because it can
Brand 1 adopts Strategy W = S and Strategy W = C, respectively.
reap more profit. This assumption suggests that the follower can
Then we have that Brand 1 will target both consumer groups
be risk averse or risk neutral, while the leader is risk neutral. Dif-
if p < p < pmax
c for k > 0 or p < p for k < 0 (W = B), only target
fering from the studies in the literature, here the leader (Brand 2)
snobs if p > p̄ for k > 0 or pmax c < p < p̄ for k < 0 (W = S); and
can be risk averse as it faces the risk of profit change in its orig-
otherwise, only target conformists (W = C) (see the detailed
inal product line, rather than the risk in the shared revenue from
derivations in the Appendix). These thresholds ensure the non-
the co-branding project. In such a case, leadership does not nec-
negativity of demands (DW W
c and Ds ). Then the demands for the
essarily ensure Brand 2 a high profit margin. As noted in previous
two consumer groups (DW s and DW c ) under different strategies
studies (for example, Völckner & Sattler, 2006; Wang, Liu, Shen, &
are:
Wei, 2019), co-branding can have a negative impact on the par- ⎧ k( p−pmax )
ticipating brands especially on the luxury brand, and this suggests ⎨ 1+b−s β , W = B,
DW as −δ p+θs u
that Brand 2 can be also risk averse. With two different risk pref- s = , W = S, (9)
erences of two brands, there are four combined risk preferences
⎩ 1+b
0, W = C,
F = {NN, AN, NA, AA}, in which the first and the second letters rep-
and
resent the risk preferences of Brands 1 and 2, respectively. ⎧ (1+b+βδ )( pmax −p)
In the presence of the co-branding project, we model the prob- ⎨ 1+b−β
c
, (W = B ),
lem as a Stackelberg game (as in Osborne & Rubinstein, 1994), with DW
c = 0, (W = S ), (10)
luxury Brand 2 being the leader and fast-fashion Brand 1 being the
⎩ ac −p+θc u , (W = C ).
1 −β

304
Q. Zhang, J. Chen and J. Lin European Journal of Operational Research 297 (2022) 301–318

Table 1
Notation.

Index

i: consumer group, i = {s, c} F : risk preferences of two brands, F = {NN,

j: Brand j, j = 1, 2
W : market-targeting strategy, W={B, S, C }
Decision variables
u: quality investment by Brand 1
φ : quality investment support by Brand 2
Parameters
ai : consumer group i’s potential market size
δ : price sensitivity of snobs
β : level of conformity effect
ε j : random impact of co-branding sales on
the profit change of Brand j, j ∈ {1, 2}
λ j : risk-aversion degree of Brand j
AN, NA, AA}
p: retail price by Brand 1
θi : quality investment effectiveness on consumer
group i’s demand
b: level of exclusivity effect
r: revenue-sharing rate of Brand 2
σ j2 : variance of ε j
η j : cost of risk of Brand j


θc + θs , if W = B,
For W = {B, S, C }, we define θW = θs , if W = S,
θc , if W = C,

ac + as , if W = B,
and aW =as , if W = S, as the quality investment ef-
ac , if W = C,
fectiveness on the demand and the potential market size
of market-targeting strategy W , respectively. We define

(1 + δ )(1 + b − β ), if W = B,
e = δ ( 1 + b ),
W if W = S, as the combined effec-
1 − β, if W = C,
tiveness of price factor and social influence on the demand under

1 + δ, if W = B,
Strategy W . We let ρ W = δ, if W = S, be the price factor of
1, if W = C,
Strategy W . The corresponding equilibrium decisions for the game
problem in Eq. (8) can be derived and presented as follows.

Proposition 1. For F = AA and W = {B, S, C }, the equilibrium selling

price ( pW F ), quality investment (uW F ), and investment support (φW F )
are Fig. 1. The change of r̄W F with θ W .
η1 (8e − (3 − r )(θ ) ) 8e a − (a (1 − r ) + 2ρ η2 )(θ )
W W 2 W W W W W 2
pW F = + ,
4(1 − r )(4eW − (θ W )2 ) 4ρ W (4eW − (θ W )2 )
participate in the co-branding. The reason is that a high quality
θ W (aW (1 + r ) − ρ W (η1 + 2η2 ))
uW F = , and investment effectiveness contributes to high total co-branding rev-
2(4eW − (θ W )2 )
enue, such that a low revenue-sharing rate is sufficient to offset
(a (1 − r ) − (1 + r )η1 ρ + 2(1 − r )η2 ρ W )(θW )2
W 2 W
Brand2s quality investment cost.
φW F =
4eW (aW (1 + r ) − (η1 + 2η2 )ρ W )
With the equilibrium decisions in Proposition 1, the impacts of
(η1 − 2η2 )ρ W + (3r − 1 )aW aW , θ W , r, β , and b on the equilibria for F = AA and W = B are sum-
+ W ,
a (1 + r ) − (η1 + 2η2 )ρ W marized in Corollary 1.
i.e., these equilibria solve the Stackelberg game defined in (8).
Corollary 1. For F = AA and W = B,
To attract Brand 2 to participate in the co-branding program,
we obtain the following minimum revenue-sharing rate (r̄W F ):

ρ W ((θ W )4 (ρ W )2 (η1 +2η2 )2 −8η1 (θ W )2 aW (5eW − (θ W )2 ) −16η2 (θ W )2 eW aW + 16(aW )2 (9eW −2(θ W )2 ))
WF
r̄ = 
2(θ W )2 aW ρ W
2aW + ρ W (η1 + 2η2 ) 6eW
+ − W 2 , for W = {B, S, C } and F = AA.
2a W (θ )
This means that Brand 2 will participate in this co-branding pro-
gram only when the revenue-sharing rate can be negotiated in
the range (r̄W F < r < 1). Intuition suggests that, Brand 2 is willing 1) pW F and uW F increase with aW , θ W , r and β , and decrease with
to provide quality investment support to Brand 1 only when the b;
(1−r )η
shared co-branding profit is sufficiently large to cover the invest- 2) φW F increases with aW if and only if η1 < r
2
; φW F in-
ment cost. creases with r; φ W F increases (decreases) with θ and β (b) if and
W
(1−r )(aW (1−r )+2ρW η2 )
Note that the minimum revenue-sharing rate r̄W F decreases only if η1 < ηW F , where ηW F = ρW (1+r )
.
with θ W (illustrated in Fig. 1), implying that if both brands are
risk averse, for each market-targeting strategy (W ), as the qual- Note that pW F and uW F increase with aW , θ W , and β , but de-
ity investment effectiveness increases, Brand 2 is more likely to crease with b. Intuition suggests that Brand 1 is willing to in-

305
Q. Zhang, J. Chen and J. Lin
crease quality investment and retail price when facing either a
large market size, or high quality investment effectiveness. High
conformity (low exclusivity) can attract more consumers, which
encourages Brand 1 to improve quality investment and raise the
retail price correspondingly. All equilibrium decisions increase with
r, as a high revenue-sharing rate motivates Brand 2 to provide a
high investment support, which stimulates Brand 1 to invest more
in quality improvement and charge a high retail price.
Corollary 1 also shows that φW F increases with aW , θ W , and β ,
but decreases with b when the cost of risk η1 is relatively low
(1−r )η2
( η1 < r or η1 < ηW F ). This indicates that Brand 2 improves its
investment support when it faces a high aW , θ W , and β or a low
W 1
W F ), for
b, only if Brand1s cost of risk is sufficiently small. This can be ex-
plained as follows. When the cost of risk η1 is relatively low, Brand
1 is motivated to improve quality investment in the co-branded
product with the increase in aW (or θ W or β ), resulting in an in-
crease in the retail price that can generate more total revenue. To
share more profit, Brand 2 is willing to provide a high investment
support to further stimulate Brand 1’s quality investment. How-
ever, when the cost of risk η1 is relatively large, Brand 1 tends
BF 1
SF1
BF 1
CF1
to reduce quality investment and the corresponding demand de-
creases. Although Brand 1 can achieve cost savings, its expected
profit decreases. With the increase of aW (or θ W or β ), Brand 2
can always benefit from an increase in cost savings by reducing its
investment support. Conversely, with a low η1 , as Brand 1 tends to
decrease the retail price and quality investment as b increases, in
response, Brand 2 lowers its investment support. However, given a
large η1 , the retail price can be higher and the quality investment
is lower as compared to a low η1 , resulting in a large decrease in
demand. In such a case, Brand 2 is willing to increase investment
support with the increase of b to mitigate the negative impact on
demand from the decrease in quality investment.
Corollary 2 gives the impacts of cost of risk (η1 , η2 ) on the
equilibrium decisions of the two brands for F = AA and W = B. We
W ρW η2
define rW F = max{0, 3 − (θ8W
e
)2
}, r˜W F = aW
and řW F = 1 −
Corollary 2. For F = AA and W = B,
1) pW F increases with η1 if and only if r > rW F , and decreases
with η2 ;
2) uW F decreases with η1 and η2 ;
3) φW F increases with η1 if and only if r > r˜W F , and increases
with η2 if and only if r > řW F .
Corollary 2 shows that as Brand1s cost of risk η1 increases,
Brand 1 is more likely to increase the retail price with a high
revenue-sharing rate and lower the quality investment, and Brand
2 tends to improve its investment support given a high revenue-
sharing rate. This result differs from the studies in the literature
(for example, Cui, Chiu, Dai, & Li, 2016; Wang et al., 2019), which
show that a firm tends to reduce its operations and marketing de-
cisions as its degree of risk aversion increases. The reason is that in
our setting the uncertainty comes from the sales of the co-branded
product. As seen from Eq. (8), as η1 negatively impacts Brand1s
objective function, Brand 1 expects to a low demand. Thus, with
the increase of η1 , Brand 1 has an incentive to increase pW F and
decrease uW F . Brand 2 is willing to increase φW F only when it can
share a relatively large portion of revenue (r > r˜W F ). The result im-
plies that in the presence of risk aversion, a high revenue-sharing
rate is needed for Brand 2 to increase the quality investment sup-
port when Brand 1 faces a high cost of risk. This can be explained
as follows. When Brand 2 is risk averse, it anticipates a low de-
mand for the co-branded product, which discourages its improve-
ment in φW F . If the revenue-sharing rate is sufficiently high, how-
ever, Brand 2 is motivated to improve φW F to mitigate the negative
effect of demand decrease on its share of the profit.
European Journal of Operational Research 297 (2022) 301–318
Corollary 2 also shows that all equilibrium decisions (except for
φW F ) decrease with η2 . φW F increases with η2 only when r is rel-
atively large (r > řW F ), as it increases with η1 .
We can derive the impacts of aW , θ W , r, β , b, η1 and η2 on the
equilibrium decisions, and we find that when Brand 1 only tar-
gets one group of customers, either snobs (W = S) or conformists
(W = C), the impacts are the same as when Brand 1 targets both
groups of customers (W = B), except that β does not have an im-
pact on the equilibrium decisions (for W = S), and b does not have
an impact on the equilibrium decisions (for W = C).
With Proposition 1 and the profit functions of the two brands,
we obtain their equilibrium expected profits (
F and
2
F = AA and W = {B, S, C }.
We now discuss Brand1s optimal market-targeting strategy. For
F = AA, let aFc and āFc be the boundary values of ac for DBF c =0
and DBF s = 0, respectively, which are given in the Appendix. There-
fore, it can be inferred that DBF F BF
c < 0 if ac < ac and Ds < 0 if ac >
āFc , suggesting that Brand 1 can only target snobs if ac < aFc , and
only target conformists if ac > āFc . Let aˆFc and a˜Fc be the boundary
values of ac that satisfy
=
and
=
, respectively.
Proposition 2 presents Brand 1’s optimal market-targeting strategy.
Proposition 2. For F = AA, Brand1s market-targeting strategy is:
1) Strategy S: targeting snobs only (W = S) if and only if 0 < ac <
aˆFc ;
2) Strategy B: targeting both snobs and conformists (W = B) if and
only if aˆFc ≤ ac ≤ a˜Fc ;
3) Strategy C: targeting conformists only (W = C) if and only if
ac > a˜Fc , where aFc < aˆFc < a˜Fc < āFc .
Proposition 2 shows an interesting result. Although Brand 1 can
capture both consumer groups when aFc ≤ ac ≤ āFc , it strategically
gives up the conformist market when ac is in region [aFc , aˆFc ] or the
snob market when ac is in region [a˜Fc , āFc ]. It only targets both mar-
kets when aˆFc ≤ ac ≤ a˜Fc , although it can generate demands from
ρW η1 both consumer groups when aFc ≤ ac ≤ aˆFc and a˜Fc ≤ ac ≤ āFc . The
aW
.
reason is that in these two regions, either the conformist market
or the snob market is relatively small. Although giving up a por-
tion of the market leads to a decrease in demand (negative de-
mand effect), this strategic behavior allows Brand 1 to charge a
higher retail price (positive price effect), and make a lower qual-
ity investment (positive cost saving effect). The two positive effects
can offset the negative effect of the decrease in demand, leading to
an increase in Brand1s expected profit.
In this paper, we refer to [aFc , aˆFc ] and [a˜Fc , āFc ] as Brand1s
strategic market-abandonment regions. Fig. 2 illustrates Brand1s
market-targeting strategy.
Notice that the boundary values in Fig. 2 are functions of as ,
implying that Brand1s marketing-targeting strategy focuses only
on snobs when ac is lower relative to as , and only on conformists
when ac is higher relative to as . It will capture both consumer mar-
kets when ac is competitive to as . The implication of this result is
that when Brand 1 decides its market-targeting strategy, it should
be aware of the base market sizes of the two customer groups.
It can estimate the base market sizes of two customer groups
through marketing research or by referring to historical data.
5. Analysis for other risk preferences of the two brands
In this subsection, we derive the equilibrium decisions for the
other three risk preferences of the two brands, F = {NN, AN, NA}.
Notice that they can be considered as special cases of F = AA.
Specifically, F = AA can be reduced to F = N N when η1 = η2 = 0,
to F = AN when η2 = 0, and to F = NA when η1 = 0. With the de-
mand functions in Eqs. (1) and (2), and game problem in Eq. (8),
the equilibrium decisions of the two brands are summarized as fol-
lows.
306
Q. Zhang, J. Chen and J. Lin European Journal of Operational Research 297 (2022) 301–318

Fig. 2. Sketch of Brand1s market-targeting strategy.

Table 2
The equilibrium decisions for F = {NN, AN, NA}.

F pW F uW F φW F

aW (8eW − (1 − r )(θ W )2 ) (1 + r )aW θ W ( 1 − r )2 ( θ W )2 3r − 1

NN +
4ρ W (4eW − (θ W )2 ) 2(4eW − (θ W )2 ) 4(1 + r )eW 1+r
η1 (8eW − (3 − r )(θ W )2 ) aW (8eW − (1 − r )(θ W )2 ) θ W (aW (1 + r ) − η1 ρ W ) (aW (1 − r )2 − η1 ρ W (1 + r ))(θ W )2 η1 ρ W + aW (3r − 1 )
AN + + W
4(1 − r )(4eW − (θ W )2 ) 4ρ W (4eW − (θ W )2 ) 2(4eW − (θ W )2 ) 4eW (aW (1 + r ) − η1 ρ W ) a ( 1 + r ) − η1 ρ W
8a e − (2ρ η2 + (1 − r )aW )(θ W )2
W W W
θ W (aW (1 + r ) − 2ρ W η2 ) (a (1 − r ) + 2ρ η2 )(1 − r )(θ )
W W W 2
aW (3r − 1 ) − 2ρ W η2
NA + W
4ρ W (4eW − (θ W )2 ) 2(4eW − (θ W )2 ) 4eW (aW (1 + r ) − 2ρ W η2 ) a (1 + r ) − 2ρ W η2

Proposition 3. For a given market-targeting strategy W = {B, S, C } 2) for F = NA, all equilibrium decisions ( pW F , uW F , φW F ) decrease
and the two brands’ risk preferences F = {NN, AN, NA}, the equilib- with η2 .
rium selling price ( pW F ), quality investment (uW F ), and investment
support (φW F ) are summarized as in Table 2. Corollary 4 shows that if F = AN, as η1 increases, pW F in-
creases when r is sufficiently large (η1 > rW F ), and uW F decreases.
Then we have the minimal rate (r̄W F ) at which Brand 2 will These results are consistent with those for F = AA. However, un-
participate in the co-branding program, where like when F = AA, φW F always increases with η1 . This is because
⎧  Brand 1 tends to increase pW F for a high margin and decrease
⎪
⎪ ( θ )
W 2
− 6 eW
+ 2 eW (9eW − 2(θ W )2 ) uW F to reduce quality investment costs, resulting in a low demand;
⎪
⎪ , i f F = NN,
⎪
⎪ ( θ )2
W
⎨ (4eW aW − η1 ρ W (θ W )2 )(36eW aW − (θ W )2 (η1 ρ W + 8aW )) η1 ρ W + 2aW 6eW
r̄W F = + − W 2, i f F = AN,
⎪
⎪  2a ( θ )
W W 2 2aW (θ )
⎪
⎪ ρ W ((θ W )4 (ρ W )2 η22 − 4(θ W )2 eW aW η2 + 4(aW )2 eW (9eW − 2(θ W )2 )) η2 ρ W + aW
⎪
⎪ 
6eW
⎩ + W
− W 2,
(θ )
i f F = NA.
(θ W )2 aW ρ W a

Similar to F = AA in which both brands are risk averse, we find

that Brand 2 is willing to provide quality investment support to
Brand 1 if it is given a sufficiently large revenue-sharing rate (r̄W F ),
and r̄W F increases with θ W (similar to Fig. 1).
With the decisions in Proposition 3, we discuss the impacts of
market size aW , quality investment effectiveness θ W , social influ-
ences β and b, and revenue-sharing rate r on the equilibrium sell-
ing price ( pW F ), quality investment (uW F ), and investment support
(φW F ) for F = {NN, AN, NA} and W = {B, S, C }, which are given in
Corollary 3. We define ηW F = aρW((11+
−r ) W 2
r)
for F = AN.
W F and
W F ) are
Corollary 3. For F = {NN, AN, NA}, the impacts (positive (+) and neg-
ative (–)) of market size (aW ), quality investment effectiveness (θ W ),
revenue-sharing rate (r), and social influences (β ) and (b) on the
equilibrium decisions for W = {B, S, C } are summarized in Table 3.
Table 3 shows that for F = {N N, N A}, all equilibrium decisions
increase with aW , θ W , r and β , but decrease with b; for F = AN,
however, φW decreases with aW , and increases with θ W and β
while decreases with b when η1 is relatively low (η1 < ηW F ). This
is consistent with the results of F = AA when η2 = 0.
Corollary 4 gives the impact of cost of risk (η1 , η2 ) on the
equilibrium decisions when the two brands have asymmetric
risk preferences (F = {AN, NA}) for W = {B, S, C }. We define rW F =
eW
max{0, 3 − (θ8W )2
} for F = AN.
Corollary 4. For W = {B, S, C },
1) for F = AN, pW F increases with η1 if and only if r > rW F ; uW F
decreases with η1 ; and φW F increases with η1 .
Brand 2 is more likely to provide a high φW F to avoid losses due
to the decrease in uW F and in the total demand.
We find that all equilibrium decisions decrease with η2 for
F = NA. This is because Brand 2 expects to have a low demand and
thus reduces φW F , and Brand 1 will react to reduce its quality in-
vestment and the retail price.
With the equilibrium decisions in Proposition 3, the corre-
sponding expected profits for the two brands (
1 2
obtained. We can easily conclude that Brand1s market-targeting
strategy is similar to that we presented in Proposition 2 with dif-
ferent thresholds aˆFc , a˜Fc , aFc and āFc (given in the Appendix), for
F = {NN, AN, NA}. Likewise, strategic market-abandonment regions
[aFc , aˆFc ] and [a˜Fc , āFc ] exist, where Brand 1 will strategically give up
either the conformist or the snob market even though it could cap-
ture both markets.
6. Effect of the cost of risk on the two brands’ expected profits
A risk averse decision-maker generally tends to reduce retail
price and quality investment, which may lead to a low expected
profit (Liu, Choi, Yuen, & Ng, 2011; Wang et al., 2019). In this sec-
tion, we will examine the impact of the risk aversion attitudes of
the two brands on the expected profits in this co-branding project.
r (1−r )aW (θ W )2
We define η̄W
1
= ρW (8eW −(1+r )(θ W )2 )
and ηˆ W
1
=
(1−r )(θ W )2 (raW −ρW η2 )
ρW (8eW −(1+r )(θ W )2 )
, for W = {B, S, C }. With the expected profit of
Brand j, we have the following results.

307
Q. Zhang, J. Chen and J. Lin European Journal of Operational Research 297 (2022) 301–318

Table 3
The impacts of aW , θ W , r, β and b on the equilibrium decisions for F = {NN, AN, NA}.

pW F and uW F φW F
W =B W =S W =C W =B W =S W =C
aW + If F = {N N, N A}, +; if F = AN ,−
θW + If F = {N N, N A}, +
If F = AN,

+, if η1 < ηW F
−, otherwise
r + +
β + / + If F = {N N, N A}, + / If F = {N N, N A}, +

+, if η1 < ηW F
If F = AN,
 If F = AN,
−, otherwise
+, if η1 < ηW F
−, otherwise
b − / If F = {N N, N A},− /

+, if η1 > ηW F
If F = AN,
−, otherwise
where: “/” refers to no impact of the parameters on the equilibria.

Lemma 1. For W = {B, S, C }, assumptions, and focus on Case F = AN to show the impact of η1
∂ W F ∂ W F
on the expected profits of the two brands.
1) for F = AN, ∂η1 > 0 if and only if 0 <
1
η1 < η̄W
1 and ∂η1 <
1
Assumption 1 (risk source): the uncertainty does not come from
∂ W F
0, otherwise; ∂η2 < 0; the impact of co-branded product sales on one brand’s profit, but
1
∂ W F ∂ W F from the impact on the total demand of the co-branding partner-
2) for F = AA, ∂η1 > 0 if and only if 0 <
1
η1 < ηˆ W
1 and ∂η1 <
1
ship, i.e., D (u, p) = D(u, p) + ε .
∂ W F Assumption 2 (contract type): the two brands compete vertically
0, otherwise; ∂η2 < 0.
1
under a wholesale price contract, in which Brand 2 (leader) sets
Lemma 1 indicates that the expected profit of Brand 1 is con- the wholesale price and Brand 1 (follower) sets the retail price and
cave with respect to η1 , regardless of the risk attitude of Brand 2. the quality investment.
Specifically, as η1 increases, Brand1s expected profit first increases Based on the above two assumptions (as in Choi et al., 2019),
and then decreases when it is risk averse; Brand2s expected profit we have the following results.
always decreases, independent of its risk attitude. Since Brand1s
Remark 1. When both assumptions hold and eW > 12 (θ W )2 , con-
quality investment decreases and Brand2s investment support in-
sistent with Choi et al. (2019), Brand 1 is worse off and Brand 2 is
creases as η1 increases (Corollaries 2 and 4), a relatively large cost
better off from Brand1s risk aversion. When one of the assump-
saving is created for Brand 1. Along with the trend that the retail
tions does not hold, there always exists a region where Brand 1 is
price may increase, Brand 1 can benefit from the increase of η1 at
better off from Brand1s risk aversion if η1 is below a threshold,
first. However, as η1 continues to increase, the further reduction
and Brand 2 is always worse off.
in quality investment leads to a significant decrease in demand
and this negative effect outweighs the positive effect of the cost Remark 1 suggests that both risk source and type of con-
savings for Brand 1. Therefore, Brand1s expected profit decreases tract strongly affect the equilibrium decisions. Under Assumption
with η1 . Furthermore, the decrease in the cost savings due to the 1, the downside-risk measure is S[π1 ] = η1 p(1 − r ). By contrast, in
increased investment support cannot compensate for the profit re- this paper, the uncertainty comes from uncertain profit changes
duction from the decrease in demand. Therefore, Brand 2 is always caused by the sales of the co-branded product, leading to a differ-
worse off with the increase of Brand1s cost of risk. For the same ent downside risk, which is measured as S[π1 ] = η1 D(u, p). Thus,
reason, when Brand 2 is risk averse, as Brand1s risk cost (η1 ) in- Brand 1 has an incentive to increase the retail price (Corollary 4)
creases, Brand1s expected profit first increases and then decreases, (as opposed to that Brand1s incentive is to reduce the retail price
and Brand2s expected profit always decreases. under Assumption 1 in Choi et al. (2019)). In this paper, we as-

Define W j
( jW ) as the expected-profit difference of Brand sume that the two brands compete horizontally under a cost- and
j due to Brand1s risk aversion. Then W
j
= WAN
j
− W
j
NN and profit-sharing contract (rather than competing vertically under a
 wholesale price contract under Assumption 2 in Choi et al. (2019)).
 jW = WAA
j
− W
j
NA , and we have the following results.
Our results show that, affected by these two differences, Brand 1
Proposition 4. For W = {B, S, C }, may benefit from its risk aversion, but Brand 2 is always worse off.
1) W > 0 if and only if 0 < η1 < 2η̄W ; W < 0; Similarly, Brand 1 can also benefit from its own risk aversion when
1 1 2
  Brand 2 is also risk averse (Case F = AA). Therefore, we can con-
2) 1W > 0 if and only if 0 < η1 < 2ηˆ W
1 ; 2 < 0 .
W
clude that both brands can be worse off, or Brand 1 can be better
Proposition 4 shows that independent of Brand2s risk status, off from Brand1s risk aversion.
Brand 1 is better off from its risk aversion if the cost of risk is The impacts of Brand2s risk aversion attitude on the expected
relatively low, but worse off otherwise; Brand 2 is always worse off profits of the two brands are summarized as follows.
from Brand1s risk aversion. Brand 1 benefits most from its risk-
Proposition 5. Independent of Brand1 risk preference (either risk
averse attitude when η1 = η̄W 1 (Lemma 1). aversion or risk neutral), both brands are worse off from Brand2s risk
This interesting finding differs from the intuition that a brand in
aversion.
a supply chain price game is worse off from its own risk-averse at-
titude but benefits from the other’s risk-averse attitude (as in Choi Proposition 5 shows that Brand2s risk-averse attitude reduces
et al., 2019). To explain this difference, we give the following two the expected profits of both brands, due to the decrease in the

308
Q. Zhang, J. Chen and J. Lin
Fig. 3. The market-targeting strategy.
equilibrium decisions (see Corollaries 2 and 4), differing from Choi
et al. (2019). Here, we focus on Case F = NA to examine the impact
of η2 on the expected profits of two brands.
Remark 2. When both of the above assumptions hold, Brand 1
is better off but Brand 2 is worse off from Brand2s risk aver-
sion. When one of the assumptions does not hold, both brands are
worse off.
Remark 2 implies that when both of the above assumptions
hold, Brand 1 is better off but Brand 2 is worse off from Brand2s
risk aversion. This result is in line with Choi et al. (2019).
Remark 2 also implies that our different finding in Proposition 5 is
due to the different risk source and contract type. Specifically,
under Assumption 1, the downside-risk measure is S[π2 ] = η2 pr,
while it is S[π2 ] = η2 D(u, p) in this paper. This significantly im-
pacts Brand2s pricing decision. In addition, with different types
of contract and competition, Brand 1 is always worse off from
Brand2s risk aversion. For the same reason, both brands are also
worse off from Brand2s aversion when Brand 1 is risk averse (Case
F = AA).
7. Numerical analysis
In this section, we provide managerial insights via numerical
examples which examine the impacts of key system parameters
on Brand1s market-targeting strategy, and on the expected prof-
its of the two brands. We set ac = 1.2, as = 4, θc = 0.5, θs = 0.6, β =
0.2, b = 0.1, δ = 0.8, r = 0.6, λ1 = 0.2, σ1 = 0.2, λ2 = 0.2, and σ2 =
0.2. We choose these parameter values to ensure the non-
negativity of demands for the two markets.
7.1. Impacts on market-targeting strategy
We first discuss the general case in which both brands are risk
averse (F = AA) by illustrating Brand1s market-targeting strategy
and analyzing the impacts of key parameters on this strategy.
Fig. 3 illustrates Brand1s market-targeting strategy for the gen-
eral Case F = AA. In regions ac ∈ (0.5, 13.3 ), Brand 1 has demands
from both consumer groups, and obtains its corresponding ex-
pected profit (black line). Fig. 3 clearly shows that the expected
profit of Brand 1 is lower in regions ac ∈ [0.5, 1.2] (in Region G1 )
and ac ∈ [11.4, 13.3] (in Region G2 ) if it captures both groups. In-
stead, Brand 1 is more profitable with its marketing strategies
309
European Journal of Operational Research 297 (2022) 301–318
Table 4
The impacts on the strategic
market-targeting regions.
F Parameter G1 G2
AA b ↑ ↓ ↓
β↑ ↑ ↓
r↑ ↑ ↑
η1 ↑ ↓ ↓
η2 ↑ ↓ ↓
W = S for ac ∈ [0.5, 1.2] and W = C for ac ∈ [11.4, 13.3] (red lines),
which are Brand1s strategic market-abandonment regions where
it strategically gives up the conformist and snob markets, respec-
tively (Proposition 2). Brand1s market-targeting strategy is to tar-
get snobs only (W = S ) when ac < 1.2 (potential market of con-
formists is small), both snobs and conformists (W = B) when 1.2 ≤
ac ≤ 11.4 (potential market of conformists is moderate), and con-
formists only (W = C) when ac > 11.4 (potential market of con-
formists is large). For our numerical example, as we set the basic
market size value for conformists ac = 1.2, which is in the Region
G1 , the target-marketing strategy under the parameter setting is
W = S.
Table 4 presents the impacts of b, β , r, η1 , and η2 on the strate-
gic market-abandonment regions (G1 and G2 ) for F = AA. The nu-
merical studies provide some addition insights. First, both of the
strategic market-abandonment regions (G1 and G2 ) shrink with the
increase of b, η1 , and η2 , but expand with r. This suggests that
Brand 1 is less likely to give up either the conformist or snob mar-
ket strategically when it faces a high exclusivity effect or cost of
risk, but it is more likely to do so when the revenue-sharing rate
(r) is large. The reason is that, when b (or η1 , or η2 ) increases, de-
mands from both conformists and snobs drop, and this imposes
a relatively large threshold aFc and a relatively low threshold āFc
(both Regions G1 and G2 shrink) such that Brand 1 can capture
both consumer groups. Second, as β increases, Region G1 increases,
and Region G2 decreases. This is because the demand from con-
formists increases and from snobs decreases, and this implies that
a relatively low ac (expands the strategic Region G1 ) and a low
āc (shrinks the strategic Region G2 ) allow Brand 1 to capture both
markets.
We now examine the impacts of key parameters on Brand1s
market-targeting strategy, and Brand2s preference on Brand1s
market-targeting strategy when two brands have asymmetric pref-
erence (F = AN).
Fig. 4 describes the impacts of social influences on Brand1s
market-targeting strategy for F = AN. As b increases, when β is
relatively low (β < 0.2 in this numerical example), Brand 1 al-
ways adopts Strategy W = S by targeting snobs only, and switches
from targeting both markets to the snob market only when fac-
ing a large β (β > 0.2), suggesting that Brand 1 prefers to give
up the conformist market. This is because the demand from con-
formists declines, stimulating Brand 1 to strategically abandon the
conformist market and focus on the snob market only, where it
can expect more profit from either charging a high price or incur-
ing a low quality investment cost. In addition, we also find that
Brand 1 will switch from targeting snobs only to both consumer
groups when β increases. Obviously, a high conformity effect at-
tracts more conformists such that Brand 1 is more profitable by
targeting both markets.
Fig. 5 illustrates Brand1s market-targeting strategy with vary-
ing r and η1 for F = AN, where η1 changes from 0 to 0.2 by vary-
ing λ1 from 0 to 1 and keeping σ1 unchanged. It shows that as η1
increases, when r is moderate (between 0.30 and 0.65), Brand 1 al-
ways targets snobs only; when r is relatively large (r > 0.7), on the
other hand, Brand 1 switches from targeting both consumer groups
Q. Zhang, J. Chen and J. Lin
Fig. 4. The impacts of b and β on the market-targeting strategy.
Fig. 5. The impact of η1 and r on market-targeting strategy.
to snobs only. Brand 1 increases the retail price and reduces qual-
ity investment due to a high cost of risk (Corollary 4), resulting in
a decrease in the demand from conformists. With a low basic de-
mand, Brand 1 tends to give up the conformist market. Meanwhile,
as r increases, we find that Brand 1 switches from targeting snobs
only to targeting both consumer groups if η1 is less than 0.04; if
η1 is moderate (0.04 < η1 < 0.15), Brand1s market-targeting strat-
egy changes from targeting the snob market only to targeting both
markets, and then back to targeting the snob market only; when η1
is sufficiently large (η1 > 0.15), Brand 1 only focuses on the snob
market within the feasible region of r. Intuitively, with a low η1 ,
a high revenue-sharing rate encourages Brand 1 to invest more in
quality improvement, which attracts demands from both consumer
groups. With a moderate or large η1 , a high retail price due to a
high r may drive the conformists out of the market.
As the marketer of the co-branded product, Brand 1 is respon-
sible for setting the market-targeting strategy. Now we examine
whether or not its market-targeting strategy will benefit Brand 2.
Fig. 6 presents Brand2s preference for Brand1s market-targeting
strategy with varying r and η1 (with superscript apostrophe) for
F = AN. As compared to Fig. 5, in some regions, the two brands’
preferences on Brand1s market-targeting strategy are consistent,
310
European Journal of Operational Research 297 (2022) 301–318
Fig. 6. Brand2s preference on market-targeting strategy.
Fig. 7. The impact of η1 on Brand1s expected profit.
while in some regions they conflict. Brand 1 tends to strategically
give up the conformist market in a large parameter space (Region
G1 in Fig. 5), while Brand 2 is more likely to prefer both markets
in most cases (Region G in Fig. 6). Their different market-targeting
preferences are mainly derived from their individual tradeoff be-
tween profit loss and cost savings. Under the basic parameter set-
ting, for example, Brand 1 strategically gives up the conformist
market (in Region G1 ), but Brand 2 prefers to occupy both mar-
kets (in Region B ). For Brand 1, giving up the conformist market
in this region leads to a reduced demand, but the decreased qual-
ity investment helps it save cost, and the saved cost dominates
the profit loss from the reduced demand for Brand 1. Thus, Brand
1 prefers Strategy W = S. However, the saved cost does not off-
set the profit loss for Brand 2. Therefore, Brand 2 prefers Strategy
W = B.
7.2. Impacts on brands’ expected profits
Here we illustrate the impact of η1 on Brand1s expected profit,
and the impact of r and η1 on Brand2s expected profit for F = AN.
Fig. 7 shows that Brand1s expected profit is concave with re-
spect to η1 , and reaches its maximum when η1 is about 0.065
Q. Zhang, J. Chen and J. Lin
Fig. 8. The impacts of r and η1 on Brand2s expected profit.
(Lemma 1). Brand 1 benefits from its cost of risk when η1 < 0.13.
As mentioned with respect to Lemma 1, this is caused by the un-
certain impact of co-branding sales and cost- and profit-sharing
contract.
Fig. 8 depicts the impacts of r and η1 on Brand2s expected
profit. According to Fig. 5, when η1 = 0.04, Brand 1 targets both
markets in the Region r ∈ [0.75, 0.95]; when η1 = 0.12 (σ1 = 0.2
and λ1 = 0.6), Brand 1 switches from targeting both consumer
groups in the Region r ∈ [0.75, 0.83] to targeting snobs only in
the Region r ∈ [0.83, 0.95]; when η1 = 0.16 (σ1 = 0.2 and λ1 =
0.8), Brand 1 focuses on the snob market only in the Region r ∈
[0.75, 0.95].
There are two interesting findings from Fig. 8. First, Brand2s
expected profit is concave in r, which is different from the cases
of F = {N N, N A}, in which Brand2s expected profit increases with
∂
W NN ∂
W NA
r (that is, 2
∂r > 0 and 2
∂r > 0). This result shows that
Brand1s risk aversion first leads to a benefit for Brand 2 from
the revenue-sharing rate, and then a loss if r is sufficiently large.
This is because although the equilibrium investment by Brand 1,
investment support fromBrand 2, and retail price, increase with
r, the increase in the retail price (positive price effect) domi-
nates the decrease in demand (negative demand effect), and the
increase in expected profit can offset the increase in the invest-
ment cost. However, when r increases sufficiently, the negative
demand effect may dominate the positive price effect and the
increase in the investment cost further hurts Brand2s expected
profit. Second, we have shown that Brand 2 is always worse off
from Brand1s risk aversion based on a given market-targeting
strategy W = {B, S, C } (Proposition 4). However, there exists a re-
gion r ∈ [0.77, 0.83] where Brand 2 benefits from a high η1 , as
Brand1s market-targeting strategy switches from targeting both
markets when η1 = 0.12 to targeting the snob market only when
η1 increases to 0.16. When this switch happens, the market de-
mand shrinks significantly, and this allows for low quality invest-
ment and investment support. The decrease in demand leads to a
profit loss that can be offset by the increase in the cost savings.
Thus, Brand 2 can benefit from Brand1s high risk aversion in this
region.
8. Extensions
In this section, we examine two extensions of the demand func-
tion by considering whether the main results hold for: (i) uncertain
demand; and (ii) multiplicative (isoelastic) demand.
311
European Journal of Operational Research 297 (2022) 301–318
8.1. Uncertain demand
We have assumed in the main model that the demand of the
new co-branded product is deterministic. In practice, launching a
new product may be risky and the demands for conformists (Dc )
and snobs (Ds ) may be uncertain. To capture the uncertainty of
launching a new product, demands of two groups are considered
as:
D c = A c + θc u − p + β ( D c + D s ) , (11)
and
D s = A s + θs u − δ p − b( D c + D s ) , (12)
where Ai , i = {c, s} is a random variable with a mean of ai , i =

Ac + As , if W = B,
{c, s} and a variance of σD2i . We define AW = As , if W = S,
Ac , if W = C,
⎧ 2
⎨σDc + σD2s , if W = B,
and v = σD2s ,
W if W = S, as uncertain market size and
⎩σ 2 , if W = C,
Dc
its variance, respectively. With other definitions in the main
model, the total demand (D(u, p)) can be expressed as D(u, p) =
(AW −ρW p+θ W u )ρW
eW
.
The random variables Ac , As , ε1 , and ε2 are assumed to be mu-
tually independent. When both brands are risk neutral, F = N N ,
the uncertain demand does not change the equilibrium results and
they are as the same as those in Table 2. When either brand (or
both brands) is (are) risk averse, F = {AN, NA, AA}, the standard de-
viation of a brand’s profit changes, leading to different equilibrium
solutions.
Specifically, when Brand 1 is risk averse, the standard deviation
of its profit is:
S[π1 ] = S[(1 − r ) pD(u, p) − (1 − φ )u2 + ε1 D(u, p)]
ρW 
= vW (1 − r )2 p2 + σ12 vW + σ12 (aW − ρ W p + θ W u )2.
eW
When Brand 2 is risk averse, the standard deviation of its profit
is:
S[π2 ] = S[r pD(u, p) − φ u2 + ε2 D(u, p)]
ρW 
= vW r2 p2 + σ22 vW + σ22 (aW − ρ W p + θ W u )2.
eW
Then the corresponding mean-risk optimization objective func-
tion for Brand j is U j = E[π j ] − λ j S[π j ]. Since obtaining expres-
sions of solutions for the above optimization problem is technically
challenging as they are very complicated, we now numerically ex-
amine the impact of the cost of risk (here is represented by risk-
aversion level λ j ) on the equilibrium strategies and expected prof-
its for F = {AN, NA, AA}.1 Table 5 presents the equilibrium solutions
for the two brands when either λ1 or λ2 varies for F = {AN, NA}
and W = B.
Table 5 shows that the equilibrium retail price increases while
the quality investment decreases with risk-aversion level; this is
consistent with the results in Corollary 4. Furthermore, the ex-
pected profit for Brand 1 first increases and then decreases with
λ1 , and there always exists a region for λ1 where Brand 1 ben-
efits from its risk attitude. Brand 2 is always worse off from
Brand1s risk aversion. These results are consistent with those in
Proposition 4, indicating that the impacts of Brand1s risk aversion
on the two brands’ expected profits hold when the demands are
uncertain.
1
The optimal numerical solutions are obtained by using one-dimensional and
two-dimensional search algorithms. See the details in the Appendix.
Q. Zhang, J. Chen and J. Lin European Journal of Operational Research 297 (2022) 301–318

Table 5 Table 6
The impacts of λ1 and λ2 on the two brands’ expected profits. The equilibrium decisions for F = {NN, AN, NA, AA} and W = S.

F λ1 (λ2 ) pW F uW F φW F W
1
F
W
2
F
F pSF uSF φ SF
AN λ1 0 1.71 0.87 0.52 1.9757 3.1169 c γs
as cθs k1 kγ2s −1
1
γs r−(1−r )(1−θs )
NN k2 (1+b)(cγs )γs
1−θs
k1
0.1 1.73 0.86 0.52 1.9763 3.1123 as (c+η1 )θs k1 kγ2s −1

(c+η1 )γs 1
γs r−(1−r )(1−θs )
0.2 1.75 0.84 0.52 1.9744 3.1028 AN k2 (1+b)((c+η1 )γs )γs
1−θs
k1
0.3 1.77 0.83 0.52 1.9719 3.0956 γ −1
as θs (ck1 −η2 k2 )k2s
(c+η1 )γs 1
c (γs r−(1−r )(1−θs ))−η2 k2
NA λ2 0 1.71 0.87 0.52 1.9757 3.1169 NA k2
( (1+b)(cγs )γs ) 1−θs ck1 −η2 k2
γ −1
0.2 1.70 0.85 0.51 1.9700 3.1167 (c+η1 )γs as θs (η1 k1 −η2 k2 +ck1 k2s 1
(c+η1 )k1 −η2 k2
AA k2
( (1+b)((c+η1 )γs )γs ) 1−θs (c+η1 )k1 −η2 k2
0.4 1.70 0.84 0.50 1.9650 3.1161
0.6 1.69 0.82 0.49 1.9595 3.1152
Note: k1 = γs r + (1 − r )θs and k2 = (1 − r )(γs − 1 ).
Note: σDs = 0.1 and σDc = 0.1, with other basic parameters in
Section 7. Table 7
The impacts of η1 and η2 on the two brands’ expected profits.

Table 5 also shows that with the increase of Brand2s risk- F η1 (η2 ) pSF uSF φ SF SF
1 SF
2

aversion degree (λ2 ), all equilibrium solutions decrease, and the AN η1 0 5 0.0648 0.7143 0.0185 0.0648
two brands’ expected profits also decline, implying that both 0.2 6 0.0450 0.7143 0.0171 0.0450
brands are worse off from Brand2s risk aversion. The results for 0.4 7 0.0331 0.7143 0.0148 0.0331
0.6 8 0.0253 0.7143 0.0127 0.0253
uncertain demand are consistent with those in Corollary 4 and NA η2 0 5 0.0648 0.7143 0.0185 0.0648
Proposition 5 of the main model. 0.2 5 0.0576 0.6970 0.0175 0.0646
0.4 5 0.0508 0.6774 0.0164 0.0639
8.2. Multiplicative (isoelastic) demand 0.6 5 0.0445 0.6552 0.0153 0.0629

Note: as = 4, γs = 2, c = 1, θs = 0.5, b = 0.1, r = 0.6.

We have assumed a linear additive demand in the main model.
Several empirical studies (Hoch, Kim, & Montgomery, 1995; Mul-
hern & Leone, 1991), however, support that some products have
constant elasticities, and multiplicative demand function also has
been commonly used in the literature (for example, Jin, Wang, &
Qi, 2015; Petruzzi & Dada, 1999; Shi et al., 2013). Following Jin
et al. (2015), multiplicative demand functions for conformists (Dc )
and snobs (Ds ) can be written as:
Dc = ac p−γc uθc + β (Dc + Ds ),
and
Ds = as p−γs uθs − b(Dc + Ds ),
where γi , i = {c, s} is price elasticity for consumer group i, and
γc > γs > 1 (reflecting that snobs are less sensitive to the price
changes).
With Eqs. (13) and (14), we have the total demand of two con-
sumer groups:
ac p−γc uθc + as p−γs uθs
D(u, p) = Dc + Ds = . (15)
1+b−β
Here, we assume that the unit production cost for Brand 1 is c,
and consider a simple linear quality investment cost
C (u ) = u,
to guarantee the optimality and uniqueness of the solutions (Jin
et al., 2015). Thus, the profit functions of the two brands are
rewritten as:
π1 = ((1 − r ) p − c )D(u, p) − (1 − φ )u + ε1 D(u, p),
and
π2 = r pD(u, p) − φ u + ε2 D(u, p),
where D(u, p) is given in (15).
For cases F = {AN, NA, AA}, the standard deviation of Brand j’s
( j = 1, 2) profit does not change (S[π j ] = η j D(u, p)), and the mean-
risk optimization objective functions are similar to those in the
main model. Here, we take the case F = {NN, AN, NA, AA} for W = S
as one example to examine the impact of cost of risk on the equi-
librium decisions. The corresponding equilibrium decisions for this
case are summarized in Table 6.
With Table 6, it is easy to show that with an increase of η1 , pSF
increases while uSF decreases for F = {AN, AA}, and φ SF is indepen-
dent of η1 for F = AN but decreases with η1 for F = AA. In addition,
for F = {NA, AA}, pSF is always independent of η2 , and both uSF and
φ SF decrease with η2 . That is, with an increase in the cost of risk,
Brand 1 tends to increase the retail price and lower the quality in-
vestment, and Brand 2 tends to lower the quality investment sup-
port. The trends are consistent with those in Corollaries 2 and 4.
We use the numerical studies to reveal the impacts of the cost
(13) of risk on the two brands’ expected profits (results are summarized
in Table 7).
Table 7 suggests that both brands are worse off from the cost
(14) of risk (η1 and η2 ). This is different from the results in the main
model, in which Brand 1 may benefit from its risk aversion in a
small region. This result can be explained as follows: with an in-
crease in η1 , the profit margin ( pSF ) increases (positive price ef-
fect), while the quality investment cost (uSF ) declines (positive cost
saving effect), leading to a significant decrease in demand (nega-
tive demand effect). The negative demand effect cannot be offset
by the positive price and cost saving effects, resulting in a low ex-
pected profit for Brand 1. The main results in our main model hold
with a multiplicative demand, except that Brand 1 is always worse
off from its risk aversion.
(16) 9. Conclusion
Co-branding has become a popular strategy in the fashion
industry, among both fast-fashion and luxury brands. In a co-
branding project, the two companies usually both invest in quality
(17) improvement in order to attract more consumers. Driven by con-
formity and exclusivity effects (social influences), these consumers
can be classified as conformists or snobs. Due to dynamic con-
(18)
sumer taste and the vagaries of the market environment, however,
the launch of the co-branded product may have uncertain impacts
on the two brands’ original product lines, and either brand may
be risk neutral or risk averse. With consideration of social influ-
ence and brands’ risk preferences, we investigate the equilibrium
decisions on retail price, quality investment, market-targeting, and
investment support strategies, and analyze the impacts of social
influence and risk preferences on the expected profits of both
brands.
Our study offers several insights and implications. Previous
studies have suggested that the firms can be more profitable if
they capture different consumer segments in the market. Our

312
Q. Zhang, J. Chen and J. Lin European Journal of Operational Research 297 (2022) 301–318

study implies that capturing both consumer segments may not al- p < p for k > 0 or pmax
s < p < p̄ for k < 0. Thus, the demands for
ways benefit the producer of a co-branded product (Brand 1) who two consumer groups can be summarized as in Eqs. (9) and (10).
needs to set the retail price and quality investment and has in-
Proof of Proposition 1.
vestment support from its collaborator (Brand 2). Our results show
that Brand 1 can strategically abandon either the conformist or the We first solve Brand1s maximization problem with backward
snob market under certain conditions, even when it could have de- induction. For W = {B, S, C }, with definitions of θ W , aW , eW , and
mands in both markets. In the co-branding project, the producer of ρW in Section 4, and the demand functions in Eqs. (9) and (10),
the co-branded product may have different market-targeting pref- Brand1s maximization problem is
erences from its collaborator. Our study also implies that the risk
s + D c ) − ( 1 − φ ) u + ε 1 ( D s + D c )]
max U1 = E[(1 − r ) p(DW W 2 W W
attitudes of the two collaborating brands will affect the decisions u,p
on the co-branded product, including retail price, quality invest-
− η1 (DW
s + Dc ) ,
W
(A1)
ment, and investment support. Brand 1 is more likely to raise the
retail price with a high level of risk aversion, as its uncertainty (aW −ρW p+θ W u )ρW
where DW W
s + Dc can be calculated as eW
.
comes from the co-branding sales. Brand 1 is better off from its To verify the joint concavity of Brand1s objective function with
risk aversion when the cost of risk is relatively low, but Brand 2 respect to (u, p), we calculate the Hessian matrix as follows:
is always worse off. Both brands are worse off from Brand2s risk ⎡ ⎤
aversion. This result differs from those of earlier researches be- ∂ 2U1 ∂ 2U1
cause we consider a different risk source (uncertain impact of co- ⎢ ∂ u2 ∂ u∂ p ⎥.
H=⎣ 2
branding sales) and contract type (cost- and revenue-sharing con- ∂ U1 ∂ 2U1 ⎦
tract). When the market-targeting strategy switches, and the sales ∂ p∂ u ∂ p2
focus shifts from all-consumers to snobs-only, Brand 2 may benefit Since
from Brand1s risk aversion. Our results suggest that it is important
∂ U1
2
∂ 2U1 2(1 − r )(ρ W )2
to be aware of the risk attitudes of the two collaborating brands, = −2(1 − φ ) < 0, =− < 0, and
∂ u2 ∂ p2 eW
to make the appropriate decisions.  2  2   2  2 
There are several potential extensions to this study. First, this ∂ U1 ∂ U1 ∂ U1 ∂ U1
−
work considers two risk preferences (risk neutral and risk aver- ∂ u2 ∂ p2 ∂ u∂ p ∂ p∂ u
sion). In practice, some managers may be risk seeking (Choi et al., (1 − r )(ρ W )2 (4(1 − φ )eW − (1 − r )(θ W )2 )
2018). Future work could examine the impacts of the risk-seeking = > 0,
( ew )2
attitude on the co-branded products. Second, in practice, co-
branded products are usually limited editions; future work could the Hessian matrix H is negative definite. Thus, Brand1s objective
consider the quantity constraints in the co-branding problem. function is jointly concave in u and p. With the first-order condi-
tions of (A.1) w.r.t u and p, respectively, we have
Acknowledgement (aW (1 − r ) − η1 ρ W )θ W
u= , (A2)
4(1 − φ )eW − (1 − r )(θ W )2
This work was supported by National Natural Science Founda-
and
tion of China Nos. 71901173, 71672140, and 72071154, and China
Postdoctoral Science Foundation No. 311520 0 085, and Fundamental (2eW (1 − φ ) − (1 − r )(θ W )2 )η1 ρ W + 2aW eW (1 − r )(1 − φ )
p= .
Research Funds for the Central Universities No. SK2021029, and ρ W (4(1 − φ )eW − (1 − r )(θ W )2 )(1 − r )
Social Sciences and Humanities Research Council (SSHRC) IDG 430- (A3)
2018-00262, and NSERC, Canada, grant RGPIN-2016-04975. In anticipation of Brand1 reaction, Brand 2 solves

s + Dc ) − φ u + ε2 (Ds + Dc )] − η2 (Ds + Dc ).
max U2 = E[r p(DW W 2 W W W W
Appendix φ

Derivation of the demands in Eqs. (9) and (10). The second derivative of U2 with respect to φ is
∂ U2
2
8(aW (1 − r ) − η1 ρ W )eW (θ W )2 y1
From Eqs. (1) and (2), we derive the demands of conformists =− ,
(Dc ) and snobs (Ds ) as follows: ∂φ 2 (4(1 − φ )eW − (1 − r )(θ W )2 )4
ac (1 + b) + as β − (1 + b + βδ ) p + ((1 + b)θc + βθs )u where y1 = 4eW (aW (1 + r ) − (η1 + 2η2 )ρ W )φ − ρ W (8eW − (2 +
Dc = , and r )(θ W )2 )η1 + 2ρ W (4eW − (1 − r )(θ w )2 )η2 − aW ((θ W )2 (1 − r )(2 −
1+b−β ∂ 2U
r ) + 8eW (2r − 1 )). It is verified that ∂φ 22 < 0 if
as (1 − β ) − ac b + (b − (1 − β )δ ) p + ((1 − β )θs − bθc )u
Ds = .
1+b−β φ > φ̄ =
aW ((θ W )2 (1 − r )(2 − r ) + 8eW (2r − 1 )) + ρ W (8eW − (2 + r )(θ W )2 )η1 − 2ρ W (4eW − (1 − r )(θ w )2 )η2
β +(βθs +(1+b)θc )u
Let k = b − δ (1 − β ), pmax
c = ac (1+b)+as1+ b+βδ
, and 4eW (aW (1 + r ) − (η1 + 2η2 )ρ W )
,

ac b−as (1−β )+(bθc −(1−β )θs )u

pmax
s = k
. Dc and Ds can be rewritten as: that is, Brand2s objective function is concave in φ for φ > φ̄ . With
the first-order condition, we obtain
(1 + b + βδ )( pmax
c − p)
Dc = , and (aW (1 − r )2 − (1 + r )η1 ρ W + 2(1 − r )η2 ρ W )(θW )2
1+b−β φ=
k( p − pmax ) 4eW (aW (1 + r ) − (η1 + 2η2 )ρ W )
s
Ds = . (η1 − 2η2 )ρ W + (3r − 1 )aW
1+b−β + W ,
a ( 1 + r ) − ( η1 + 2 η2 ) ρ W
Define p = min{ pmax c , pmax
s } and p̄ = max{ pmax
c , pmax
s }. We have
that Brand 1 will target both consumer groups (W = B) if Dc > 0 which is verified to be larger than φ̄ . Thus, φ is the unique optimal
and Ds > 0, which gives that p < p < pmax c for k > 0 or p < p for quality investment support.
k < 0; it will only target snobs (W = S) if Ds > 0 and Dc < 0, which Substituting φ into (A.2) and (A.3), the equilibrium qual-
gives that p > p̄ for k > 0 or pmaxc < p < p̄ for k < 0; it will only ity investment and selling price can be derived, as shown in
target conformists (W = C) if Dc > 0 and Ds < 0, which gives that Proposition 1.

313
Q. Zhang, J. Chen and J. Lin European Journal of Operational Research 297 (2022) 301–318

Proof of Corollary 1. ∂ uW F θ W aW
=− W < 0, and
For F = AA and W = B, the derivatives of pW F , uW F , and φW F ∂η2 4e − ( θ W )2
with respect to aW , θ W , r, β , and b are ∂φW F ρ W (4eW − (θ W )2 )(η1 ρ W − aW (1 − r ))
= .
∂η2 eW (aW (1 + r ) − ρ W (η1 + 2η2 ))2
∂ pW F 8eW − (1 − r )(θ W )2 ∂ pW F
= > 0, It can be inferred that ∂∂η
p WF
> 0 if r > rW F = max{0, 3 − (θ8W
e
},
W
∂a W 4ρ ( 4e − ( θ ) )
W W W 2 ∂θ W 1 )2
and ∂∂η < 0 otherwise; ∂φ W F = η2 ρ , and ∂φ
WF W WF
pW F
2eW θ W (aW (1 + r ) − (η1 + 2η2 )ρ W ) ∂η1 > 0 if r > r˜ aW ∂η1 <
= > 0, 1
ρ W (4eW − (θ W )2 )2 0 otherwise; ∂φ
WF
WF = 1 − η1 ρW
, and ∂φ
WF
∂η2 > 0 if r > ř aW ∂η2 < 0 other-
∂ pW F aW (1− r )2 (θ W )2 + 2η1 ρ W (4eW − (θ W )2 ) ∂ pW F wise.
= > 0,
∂r 4ρ (1− r ) (4e − (θ ) )
W 2 W W 2 ∂β
Proof of Proposition 2.
(aW (1 + r ) − (η1 + 2η2 )ρ W )(θ W )2
= > 0, For F = AA, it is easily derived that DBF AA
(4eW − (θ W )2 )2 z2
c = 0 if ac = ac , and
z4
DBF = 0 if a = ā AA , where aAA = and ā AA = ; z 1 , z2 , z3 ,
∂ pW F (aW (1 + r ) − (η1 + 2η2 )ρ W )(θ W )2 ∂ uW F s c c c (1−r )z1 c (1−r )z3
=− < 0, and z4 are
∂b (4eW − (θ W )2 )2 ∂ aW
( 1 + r )θ w z1 =((1 −r )(1+ b+ βδ ) − 4ρ B (1+ b))(θ B )2 + 2ρ B (1
= > 0,
2(4eW − (θ W )2 ) + r )(βθs + (1+ b)θc )θ B + 8eB ((1+ b)(2ρ B − 1 ) − βδ ),
∂ uW F (aW (1 + r ) − (η1 + 2η2 )ρ W )(4eW + (θ W )2 ) ∂ uW F z2 = − (ρ B (3− r )(1 + b + βδ )η1 + 2ρ B (1 − r )(1+ b + βδ )η2
= > 0,
∂θ W 2 ( 4e − ( θ ) )
W W 2 2 ∂r
− as (1− r )(4βρ B − (1 − r )(1 + b
aW θ w
= > 0, + βδ )))(θ B )2 − 2ρ B (1 −r )((1 + b)θc + βθs )(as (1+ r )
2(4eW − (θ W )2 )
∂ uW F 2θ W (1+ δ )(aW (1+ r ) − (η1 + 2η2 )ρ W ) ∂ uW F − (η1 + 2η2 )ρ B )θ B + 8eB (as (1− r )(β (δ
= > 0,
∂β (4eW − (θ W )2 )2 ∂b − 2ρ B ) + b +1 ) + η1 ρ B (1 + b+ βδ )),
2θ (1+ δ )(a (1 + r ) − (η1 + 2η2 )ρ )
W W W
z3 =((1− r )(b+ βδ − δ ) − 4bρ B )(θ B )2 + 2ρ B (1+ r )(bθc
=− < 0,
(4eW − (θ W )2 )2
− (1− β )θs )θ B + 8eB (2bρ B − βδ − b+ δ ),
∂φW F ρ W (4eW − (θ W )2 )(η2 (1 − r ) − η1 r ) ∂φW F
= , and
∂ aW eW (aW (1 + r ) − (η1 + 2η2 )ρ W )2 ∂θ W
θ (a (1 − r ) − (1 + r )η1 ρ + 2η2 ρ W (1 − r ))
W W 2 W
= ,
2eW (aW (1 + r ) − (η1 + 2η2 )ρ W )

∂φW F (ρ W θ W (η1 +2η2 ))2 −2(8(η1 + η2 )ρ W eW + ρ W (2η2 r− (1− r )η1 )(θ W )2 )aW + (16eW − (1− r )(3+r )(θ W )2 )(aW )2
= ,
∂r 4eW (aW (1 + r ) − (η1 + 2η2 )ρ W )2
∂φW F (1 + δ )(θ W )2 (aW (1 − r )2 − (1 + r )η1 ρ W + 2η2 ρ W (1 − r ))
= , and
∂β 4(eW )2 (aW − (η1 + 2η2 )ρ W )
∂φW F (1 + δ )(θ W )2 (aW (1 − r )2 − (1 + r )η1 ρ W + 2η2 ρ W (1 − r ))
=− .
∂b 4(eW )2 (aW − (η1 + 2η2 )ρ W )

It can be shown that ∂φ > 0, ∂φ∂β > 0, and ∂φ∂ b < 0 if η1 <
WF WF WF

∂θ W
(1−r )(a (1−r )+2ρ η2 )
, and ∂φ < 0, ∂φ∂β < 0, and ∂φ∂ b > 0 other-
W W W F WF WF

ρW (1+r ) ∂θ W z4 = − (ρ B (3− r )(b+ βδ − δ )η1 + 2ρ B (1− r )(b+ βδ − δ )η2

wise; ∂φ∂ r > 0 for r̄W F < r < 1.
WF

+ as (1− r )((1 − r )(b+ βδ − δ ) + 4ρ B (1

Similarly, we can obtain the impacts of aW , θ W , r, β and b on
the equilibria for F = AA and W = {S, C }. We find that the impacts − β )))(θ B )2 − 2ρ B (1 −r )(bθc − (1− β )θs (as (1+ r )
are the same expect for that β has no impact on the equilibria for − (η1 + 2η2 )ρ B )θ B + 8eB (ρ B (b+ βδ − δ )η1
W = S, and b has no impact for W = C.
+ as (1 − r )(b + βδ − δ + 2ρ B (1 − β ))).
Proof of Corollary 2.
For F = AA, it is inferred that below the threshold aFc , Brand 1
For F = AA and W = B, the derivatives of pW F , uW F , φW F with must switch from targeting both markets to the snob market only,
respect to η1 and η2 are while above the threshold āFc , Brand 1 can target the conformist
market only. Specifically, when ac = aFc , Brand 1 has two market-
∂ pW F 8eW − (3 − r )(θ W )2 targeting choices: targeting the snob market only, or targeting both
= ,
∂η1 4(1 − r )(4eW − (θ W )2 ) markets. However, the second choice eventually results in a zero
demand from the conformists. Then, the expected profits of Brand
∂ uW F θ W aW
=− < 0, 1 for these two choices are
∂η1 2( − ( θ W )2 )
4eW
1 = max pDs (1 − r ) − (1 − φ )u ,
SF 2
∂φW F ρ W (4eW − (θ W )2 )(aW r − η1 ρ W )
= W W ,
1 = p Ds ( 1 − r ) − ( 1 − φ ) u ,
BF ∗ ∗ ∗ ∗2
∂η1 e (a (1 + r ) − ρ W (η1 + 2η2 ))2
∂ pW F ( θ W )2 where p∗ , u∗ , φ ∗ are the equilibria under Strategy W = B. Obvi-
=− < 0,
∂η2 2(4eW − (θ W )2 ) ously, SF
1
> BF 1
at ac = aFc because the former is the maximum

314
Q. Zhang, J. Chen and J. Lin European Journal of Operational Research 297 (2022) 301–318

expected profit of that problem. Since BF 1

increases with ac , + as (1− r )((1 − r )(b+ βδ − δ ) + 4ρ B (1− β )))(θ B )2
but SF is independent of ac , there exists a threshold aˆFc , under
1 − 2ρ B (1 −r )(bθc − (1− β )θs (as (1 + r ) − η1 ρ B )θ B
which SF 1
> BF1
, and above which BF
1
> SF1
, where aˆFc satisfies
BF |
1 ac =aˆF
= SF . Likewise, we can also obtain another threshold
1
+ 8eB (ρ B (b+ βδ − δ )η1 + as (1 − r )(b + βδ
c
a˜Fc , under which BF 1
> CF
1
, and above which CF 1
> BF
1
. Thus, − δ + 2ρ B (1 − β ))),
in the regions [aFc , aˆFc ] and [a˜Fc , āFc ], Brand 1 prefers to strategically
z10 =(as (4βρ B − (1− r )(1 + b+ βδ )) − 2ρ B (1 + b
give up the markets of conformists and snobs, respectively.
+ βδ )η2 )(θ B )2 − 2ρ B ((1+ b)θc + βθs )(as (1+ r )
Proof of Proposition 3.
− 2η2 ρ B )θ B + 8as eB (β (δ − 2ρ B ) + b+ 1 ), and
Similar to the proof of Proposition 1, and is omitted for conci-
sion. z11 = − (as (4ρ B (1 − β ) + (1 − r )(b+ βδ
− δ )) + 2ρ B (b+ βδ − δ )η2 )(θ B )2 −2ρ B (bθc − (1− β )θs (as (1
Proof of Corollary 3.
+ r ) − 2η2 ρ B )θ B + 8as eB (b+ βδ − δ + 2ρ B (1− β )).
Similar to the proof of Corollary 1, and is omitted for concision.
Proof of Corollary 4. Proof of Lemma 1. For F = AN and W = {B, S, C }, the derivative of
For F = AN and W = {B, S, C }, the derivatives of pW F , uW F , φW F F with respect to η is
W 1
with respect to η1 are 1

∂ W F
(aW (θ W )2 r (1 − r ) − η1 ρ W (8eW − (1 + r )(θ W )2 ))ρ W
∂ pW F 8eW − (θ W )2 (3 − r ) 1
= .
∂η1
= , ∂η1 4(1 − r )(4eW − (θ W )2 )eW
4(1 − r )(4eW − (θ W )2 )
∂ W F
r (1−r )aW (θ W )2
∂ uW F ρW θ W It is verified that ∂η1 > 0 if
1
η1 < η̄W
1 = ρW (8eW −(1+r )(θ W )2 )
,
=− < 0, and
∂η1 2(4eW − (θ W )2 ) ∂ W F
and ∂η1 < 0 otherwise.
∂φW F raW (4eW − (θ W )2 ) 1
F with respect to η is
= > 0. The derivative of W
∂η1 (1 + b − δ )((1 + r )aW − ρ W η1 )2 2 1

∂ W
2
F

It can be inferred that ∂∂η

WF W
p
> 0 if r > rW F = max{0, 3 − (θ8W
e
)2
}, ∂η1
1
∂pW F
and ∂η < 0 otherwise. ((16reW − (θ W )2 (r + 1 )2 )ρ W η1 + aW (θ W )2 (1 + r )(1 − r )2 )ρ W
=− < 0.
1
8(1 − r )2 (4eW − (θ W )2 )eW
For F = NA and W = {B, S, C }, the derivatives of pW F , uW F , φW F
with respect to η2 are Likewise, for F = AA and W = {B, S, C }, we can prove that
∂ W F
(1−r )(θ W )2 (raW −ρW η2 ) ∂ W F
∂ pW F ( θ W )2 ∂η1 > 0 if
1
η1 < ηˆ 1B = ρW (8eW −(1+r )(θ W )2 )
, and ∂η1 < 0 other-
1
=− < 0, ∂ W F
∂η2 2 ( 4e − ( θ W )2 )
W
wise. In addition, ∂η2 < 0 for any η1 > 0.
1
∂ uW F θ W ρW
=− W < 0, and Proof of Proposition 4.
∂η2 4e − ( θ W )2
∂φW F ρ W aW (1 − r )(4eW − (θ W )2 ) 1) According to Lemma 1, for W = {B, S, C }, it is easily proved
=− W W < 0. that WAN > W NN if 0 < η < 2η̄W , and WAN < W NN other-
∂η2 e ( a ( 1 + r ) − 2 ρ W η2 ) 2 1 1 1 1 1 1
wise. It is verified that WAN
2 < W 2
NN .
Thus, all equilibria decrease with η2 in this case. 2) Similarly, for F = AA and W = {B, S, C }, it is proved that
Derivation of the thresholds aFc and āFc for F = {NN, AN, NA}. WAA > W NA if 0 < η < 2η
1 ˆW , and WAA < W NA otherwise;
1 1 1 1 1
It is similar to the proof of Proposition 2. Here, we just list the 2 < 2 .
WAA W NA
thresholds as follows.
as z5 as z7 Proof of Remark 1.
aNN
c = , āNN
c = ,
z1 z6 We examine the three cases one by one: i) only Assumption
z8 z9 1 holds; ii) only Assumption 2 holds; iii) both assumptions hold.
aAN = , āAN = , and
c
( 1 − r )z1 c ( 1 − r )z6 Here, we only take Case F = AN for W = {B, S, C } as one example. i)
When Assumption 1 holds, that is, D (u, p) = (a +θ ueW
W W −ρ W p)ρ W
aNA =
z10
, āNA
z11 + ε,
c c = .
z1 z3 the game problem is
where
max E[r pD (u, p) − φ u2 ]
φ
z5 =(4βρ B − (1− r )(1+ b+ βδ ))(θ W )2 − 2ρ B (1+ r )(βθs
s.t. arg max E[(1 − r ) pD (u, p) − (1 − φ )u2 ] − η1 (1 − r ) p.
u,p
+ (1+ b)θc )θ B + 8eB (1+ b− (2ρ B − δ )β ),
(A4)
z6 =((1− r )(b + βδ − δ ) − 4bρ B )(θ B )2 + 2ρ B (1
The equilibrium outcomes for this game can be easily obtained,
+ r )(bθc − (1− β )θs )θ B + 8eB ((2ρ B − 1 )b + δ (1 − β )), with the same calculation process, and are omitted to save space.
z7 = − (4ρ B (1 − β ) + (1 − r )(b+ βδ − δ ))(θ B )2 − 2ρ B (1+ r )(bθc The derivatives of two brands’ expected profits with respect to η1
for this case are
− (1− β )θs )θ B +8eB (b + (2ρ B − δ )(1− β )),
∂ W
1
F
(1 − r )(raW (θ W )2 ρ W − eW (8eW − (1 + r )(θ W )2 )η1 )
z8 =(as (1− r )(4βρ B − (1− r )(1 + b+ βδ )) − ρ B (3 − r )(1 + b = and
∂η1 4ρ W (4eW − (θ W )2 )
+ βδ )η1)(θ B )2 − 2ρ B (1− r )((1+ b)θc ∂ 2
WF
(1 − r2 )(θ W )2 aW ρ W + eW (16reW − (1 + r )2 (θ W )2 )η1
=− < 0.
∂η1 8ρ W (4eW − (θ W )2 )
+ βθs )(as (1 + r ) − η1 ρ B )θ B + 8eB (ρ B (1 + b
∂ W F
raW ρW (θ W )2
+ βδ )η1 + as (1− r )(βδ − 2βρ B + b + 1 )), It is seen that ∂η1 > 0 if
1
η1 < η1 a = eW (8eW −(1+r )(θ W )2 )
,
∂ W F
z9 = − (ρ B (3− r )(b+ βδ − δ )η1 and ∂η1 < 0 otherwise. Thus, Brand 1 is better off when
1

315
Q. Zhang, J. Chen and J. Lin European Journal of Operational Research 297 (2022) 301–318

0 < η < 2η1a , and worse off otherwise, while Brand 2 is always F = NA for W = {B, S, C }. i) When Assumption 1 holds, that is,
D (u, p) = (a +θ ueW
W W −ρ W p)ρ W
worse off. ii) When Assumption 2 holds, that is, Brand 2 as the + ε , the game problem is
leader sets the wholesale price, and Brand 1 as the follower sets
the retail price and quality investment, their game problem is max E[r pD (u, p) − φ u2 ] − η2 r p
φ
given as: (A7)
s.t. arg max E[(1 − r ) pD (u, p) − (1 − φ )u2 ].
u,p
max E[wD(u, p) + ε2 D(u, p)]
w The equilibrium outcomes are obtained and are omitted here.
s.t. arg max E[( p − w )D(u, p) − u2 + ε1 D(u, p)] − η1 D(u, p). The derivatives of the two brands’ expected profits with respect to
u,p
η2 for this case are
(A5)
∂ W
1
F
(1 − r )raW (θ W )2
The equilibrium solutions can be obtained and are omitted here =− W < 0 and
W ∂η2 4ρ (4eW − (θ W )2 )
for space saving. Parameters satisfy η1 < ρa W to ensure all equi-
∂ W
2
F
r 2 (θ W )2 eW η2
libria positive. The derivatives of the two brands’ expected profits =− < 0.
with respect to η1 are ∂η2 2(ρ )2 (4eW − (θ W )2 )
W

This shows that both brands are worse off from Brand2s risk
∂ W
1
F
ρ W (aW − 3ρ W η1 ) aversion in this case. ii) When Assumption 2 holds, that is, Brand 2
= and
∂η1 2(4eW − (θ W )2 ) as the leader sets wholesale price, and Brand 1 as the follower sets
∂ W
2
F
ρ W (aW − ρ W η1 ) retail price and quality investment, their game problem is given as:
=− < 0.
∂η1 4eW − (θ W )2
max E[wD(u, p) + ε2 D(u, p)] − η2 D(u, p)
w
∂ W F ∂ W F (A8)
It is inferred that ∂η1 > 0 if η1 < η1 b = aW
, and ∂η1 < 0 s.t. arg max E[( p − w )D(u, p) − u2 + ε1 D(u, p)].
1 3ρ W 1 u,p
otherwise. Thus, Brand 1 is better off when 0 < η < 2η1b , and
worse off otherwise, while Brand 2 is always worse off. iii) When The equilibrium solutions can be obtained and are omitted
W
both assumptions hold, the game problem becomes here. Parameters selected satisfy η2 < ρa W to ensure all equilibria
positive. The derivatives of the two brands’ expected profits with
max E[wD (u, p)]
w respect to η2 are
(A6)
s.t. arg max E[( p − w )D (u, p) − u2 ] − η1 ( p − w ).
u,p ∂ W
1
F
ρ W (aW − ρ W η2 )
=− < 0 and
The equilibria for this scenario can also be determined, and are ∂η2 2(4eW − (θ W )2 )
omitted here for concision. The derivatives of the two brands’ ex- ∂ W
2
F
( ρ W ) 2 η2
pected profits with respect to η1 are =− W < 0.
∂η2 4e − ( θ W )2
∂ W
1
F
2ρ W (2eW − (θ W )2 )aW + (2eW + (θ W )2 )(6eW − (θ W )2 ) This also indicates that Brand2s risk aversion harms both
=− and
∂η1 8(ρ W )2 (4eW − (θ W )2 ) brands. iii) When both assumptions hold, the game problem be-
∂ 2
WF
(2eW − (θ W )2 )((2eW − (θ W )2 )η1 + 2aW ρ W ) comes
= .
∂η1 4(ρ W )2 (4eW − (θ W )2 ) max E[wD (u, p)] − η2 w
w
(A9)
∂ W F s.t. arg max E[( p − w )D (u, p) − u2 ].
2 (θ ) ,
1
We find that when parameters satisfy eW > W 2 1
∂η1 <0 u,p

∂ W F
In the same way, the equilibria for this scenario can be deter-
∂η1 > 0. That is, the leader (Brand 2) is better off from the
2
and
follower’s (Brand1s) risk aversion, while the follower (Brand 1) is mined, and are omitted here to save space. The derivatives of the
worse off. This result is consistent with that of Choi et al. (2019). two brands’ expected profits with respect to η2 are
Therefore, we can conclude that the difference between our result ∂ W
1
F
(4eW − (θ W )2 )η2 + 2ρ W aW
and that of Choi et al. (2019) is owing to the consideration of a = > 0 and
∂η2 8 ( ρ W )2
different risk source and contract type.
∂ W
2
F
η2 (4eW − (θ W )2 )
=− < 0.
Proof of Proposition 5. ∂η2 4 ( ρ W )2
When Brand 1 is risk neutral, for Strategy W = {B, S, C }, the ex- In this case, Brand 1 is better off from Brand2s risk aversion,
pected profit differences between the cases F = NA and F = N N for but Brand 2 is worse off, which is in line with Choi et al. (2019).
Brands 1 and 2 are Thus, these three cases indicate that when both assumptions
hold, Brand 1 is better off but Brand 2 is worse off from Brand2s
aW ρ W (θ W )2 (1 − r )η2
W NA
− W NN
=− < 0 and W NA
− W NN
risk aversion; when one of the assumptions dose not hold, both
1 1
4(4eW − (θ W )2 ) 2 2
brands are worse off.
(θ W )2 (ρ W )2 η22 Solving the case when demand is uncertain:
=− < 0.
4(4eW − (θ W )2 ) When demand is uncertain, since deriving the expressions of
solutions for cases F = {AN, NA, AA} is technically challenging as
Thus, both brands are worse off from Brand2s risk aversion.
they are complicated, we resort to numerical studies to examine
Similarly, we can verify that, when Brand 1 is risk averse, both
the robustness of the main results. We focus on F = {AN, NA} and
brands are worse off from Brand2s risk aversion, i.e., WAA <
j W = B. We use one-dimensional and two-dimensional search al-
WAN
j
. gorithms to obtain the optimal numerical solutions. Since F = AN
(F = NA) will be reduced to F = N N when λ1 = 0 (λ2 = 0), we thus
Proof of Remark 2.
can infer that, when the value of λ1 (λ2 ) has a small change, the
Similar to the proof of Remark 1, we examine the three cases corresponding optimal solutions are close to those in case F = N N .
individually: i) only Assumption 1 holds; ii) only Assumption 2 Denote p0 = pNNB , u0 = uNNB , and φ0 = φ NNB as the optimal solu-
holds; iii) both assumptions hold. Here, we only focus on Case tions for F = N N .

316
Q. Zhang, J. Chen and J. Lin European Journal of Operational Research 297 (2022) 301–318

Fig. A1. Brand1s optimal p∗ and u∗ when φ = 0.52 for F = AN (λ1 = 0.1).

Fig. A2. Brand2s optimal φ ∗ for F = NA (λ2 = 0.2).

1) For F = AN, we use the following algorithm to search for the
optimal solutions within the range of p ∈ ( p, p̄), u ∈ (u, ū ), and φ ∈
(φ , φ̄ ). These ranges are chosen around p0 , u0 , and φ0 , respectively.
Step 1. Given φ ∈ (φ , φ̄ ), we set φ = φ for the initial value.
Step 2. Given p ∈ ( p, p̄) and u ∈ (u, ū ), we calculate U1 for each
pair of ( p, u ). Find out the optimal ( p∗ , u∗ ) that maximizes U1 , and
calculate the corresponding expected profits
1 and
2 . References
Step 3. Set φ = φ + τ , where τ is the search step size. Repeat
Step 2 until φ = φ̄ .
Step 4. Find out the optimal φ ∗ that maximizes
2 . Then we 18(2), 216–226.
have the outputs of the optimal φ ∗ and the corresponding optimal
p∗ and u∗ .
Note that Step 2 (two-dimensional search) ensures the opti-
mal decisions ( p∗ and u∗ ) for Brand 1 for a given φ , and Steps 3
and 4 (one-dimensional search) ensure the optimal decision (φ ∗ )
for Brand 2. This solving algorithm can be obtained by using the
“for” loop statement in Matlab. Taking λ1 = 0.1 as one example, we
search for the optimal solutions within p ∈ (1.6, 1.8 ), u ∈ (0.8, 1 ),
and φ ∈ (0.4, 0.6 ). Following the algorithm mentioned above, we
obtain the optimal solutions: p∗ = 1.73, u∗ = 0.86, and φ ∗ = 0.52
(see Fig. A.1).
2) For F = NA, with a given φ , Brand1s optimal reactions are
2aW eW (1 − φ )
p( φ ) = , and (A10)
ρ (
W 4eW (1 − φ ) − (1 − r )(θ W )2 )
aW θ W (1 − r )
u (φ ) = . (A11)
ρ (
W 4eW (1 − φ ) − (1 − r )(θ W )2 )
Then we take the following one-dimensional search algorithm to
 
solve the optimal φ ∗ within the range of φ ∈ (φ , φ̄ ). This range is
chosen around φ0 .
   tics and Transportation Review, 90, 69–89.
Step 1. Given φ ∈ (φ , φ̄ ), we set φ = φ as the initial value.
Step 2. Calculate the optimal p(φ ) and u(φ ) from (A.10) and
(A.11), respectively; calculate U2 , and the corresponding expected
profits
1 and
2 . Geylani, T., Inman, J., & Hofstede, F. (2008). Image reinforcement or impairment:
  
Step 3. Set φ = φ + τ , where τ is the search step size. Repeat
 730–744.
Step 2 until φ = φ̄ .
Step 4. Find out the optimal φ ∗ that maximizes U2 . Then we
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Note that Step 2 gives the optimal reactions ( p(φ ) and u(φ ))
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solutions within φ ∈ (0.4, 0.6 ). Following the algorithm mentioned
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