Properties of Profit Premium in an Equilibrium Framework∗

This paper proposes a profit premium concept that, in addition to brand equities, also accounts for brandspecific features in the marginal costs of products. This is justified in markets where brand characteristics are pronounced since in such markets marginal costs are likely to show higher variation across brands. The paper shows that brands with a sufficiently large ratio of marginal cost and utility brand-specific intercepts may face a negative profit premium. We argue that this is an important property of our method that allows profit premium to signal when it is not profitable to invest in brand development. In order to establish the results we analyze the monotonicity of profit premium with respect to brand equity in a structural demand and supply model. We obtain monotonicity results analytically for the simple (non-random coefficient) logit demand model through comparative statics with respect to brand equity and by Monte Carlo simulations for the random coefficient logit model. An empirical study of the new car market from the Netherlands confirms our theoretical findings. Six out of the brands with the highest ratios of marginal cost and utility brand-specific intercepts have negative profit premiums. This result questions the generally believed positive relationship between brand equity and brand value.