IDEAS home Printed from https://ideas.repec.org/a/eee/indorg/v27y2009i2p206-213.html
   My bibliography  Save this article

Umbrella branding with imperfect observability and moral hazard

Author

Listed:
  • Cabral, Luís M.B.

Abstract

In a framework of repeated-purchase experience goods with seller's moral hazard and imperfect monitoring, umbrella branding may improve the terms of the implicit contract between seller and buyers, whereby the seller invests in quality and buyers pay a high price. In some cases, umbrella branding leads to a softer punishment of product failure, which increases the seller's value. In other cases, umbrella branding leads to a harsher punishment of product failure, which allows for a reputational equilibrium that would otherwise be impossible. On the negative side, under umbrella branding one bad signal may kill two revenue streams, not one. Combining costs and benefits, I determine the set of parameter values such that umbrella branding is an optimal strategy.

Suggested Citation

  • Cabral, Luís M.B., 2009. "Umbrella branding with imperfect observability and moral hazard," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 206-213, March.
    • Handle: RePEc:eee:indorg:v:27:y:2009:i:2:p:206-213
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167-7187(08)00085-4
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Andersson, Fredrik, 2002. "Pooling reputations," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 715-730, May.
    2. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
    3. Lynne M. Pepall, 2002. "The Simple Economics of Brand Stretching," The Journal of Business, University of Chicago Press, vol. 75(3), pages 535-552, July.
    4. Hakenes, Hendrik & Peitz, Martin, 2008. "Umbrella branding and the provision of quality," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 546-556, March.
    5. Luis M.B. Cabral, 2000. "Stretching Firm and Brand Reputation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 658-673, Winter.
    6. Jay Pil Choi, 1998. "Brand Extension as Informational Leverage," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(4), pages 655-669.
    7. Hongbin Cai & Ichiro Obara, 2009. "Firm reputation and horizontal integration," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 340-363, June.
    8. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    9. Miklos-Thal, Jeanine, 2008. "Linking Reputations: The Signaling and Feedback Effects of Umbrella Branding," MPRA Paper 11045, University Library of Munich, Germany.
    10. Sappington, David E M & Wernerfelt, Birger, 1985. "To Brand or Not to Brand? A Theoretical and Empirical Question," The Journal of Business, University of Chicago Press, vol. 58(3), pages 279-293, July.
    11. Sullivan, Mary, 1990. "Measuring Image Spillovers in Umbrella-Branded Products," The Journal of Business, University of Chicago Press, vol. 63(3), pages 309-329, July.
    12. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
    13. Birger Wernerfelt, 1988. "Umbrella Branding as a Signal of New Product Quality: An Example of Signalling by Posting a Bond," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 458-466, Autumn.
    14. Choi, Chong Ju & Scarpa, Carlo, 1992. "Credible spatial preemption through reputation extension," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 439-447, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pio Baake & Vanessa Schlippenbach, 2011. "Quality distortions in vertical relations," Journal of Economics, Springer, vol. 103(2), pages 149-169, June.
    2. E. Bacchiega & M. Colucci & M. Magnani, 2019. "What goes around, comes around: Reciprocal effects and double-sided moral hazard in the choice of brand licensing," Working Papers wp1136, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Alexander E. Saak, 2017. "The Value of Delegated Quality Control," Journal of Industrial Economics, Wiley Blackwell, vol. 65(2), pages 309-335, June.
    4. Kaifu Zhang, 2015. "Breaking Free of a Stereotype: Should a Domestic Brand Pretend to Be a Foreign One?," Marketing Science, INFORMS, vol. 34(4), pages 539-554, July.
    5. Volker Nocke & Roland Strausz, 2023. "Collective Brand Reputation," Journal of Political Economy, University of Chicago Press, vol. 131(1), pages 1-58.
    6. Sridhar Moorthy, 2012. "Can Brand Extension Signal Product Quality?," Marketing Science, INFORMS, vol. 31(5), pages 756-770, September.
    7. Dieter Pennerstorfer & Christoph Weiss & Andreas Huber, 2019. "Experts, Reputation and Umbrella Effects: Empirical Evidence from Wine Prices," Economics working papers 2019-08, Department of Economics, Johannes Kepler University Linz, Austria.
    8. Saak, Alexander E., 2016. "Delegation of quality control in value chains:," IFPRI discussion papers 1526, International Food Policy Research Institute (IFPRI).
    9. Takako Fujiwara-Greve & Toru Hokari, 2023. "Farsighted Clustering with Group-Size Effects and Reputations," Dynamic Games and Applications, Springer, vol. 13(2), pages 610-635, June.
    10. J.-P. Niinimäki, 2023. "Experience Goods, Umbrella Branding, and Reputation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(1), pages 33-44, February.
    11. Eric B. Rasmusen, 2016. "Leveraging of Reputation through Umbrella Branding: The Implications for Market Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(2), pages 261-273, April.
    12. Saak, Alexander E., 2016. "Traceability and reputation in supply chains," International Journal of Production Economics, Elsevier, vol. 177(C), pages 149-162.
    13. Jost, Peter-J., 2014. "How to protect your premium product from low-price competitors: Price, quality, or portfolio adjustment?," International Journal of Research in Marketing, Elsevier, vol. 31(3), pages 253-265.
    14. Pires Cesaltina Pacheco & Catalão-Lopes Margarida, 2013. "Economies of Scope, Entry Deterrence and Welfare," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(1), pages 419-452, June.
    15. Cesaltina Pacheco Pires & Margarida Catalão-Lopes, 2012. "Scope economies, entry deterrence and welfare," CEFAGE-UE Working Papers 2012_11, University of Evora, CEFAGE-UE (Portugal).
    16. Alexander E. Saak, 2012. "Collective Reputation, Social Norms, and Participation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(3), pages 763-785.
    17. Brishti Guha, 2017. "Moral hazard, Bertrand competition and natural monopoly," Journal of Economics, Springer, vol. 121(2), pages 153-171, June.
    18. YiLin Wu, 2011. "Brand Reputation and the Cost of Capital: Evidence of Adopting a Brand Name as the Corporate Name," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 15(2), pages 29-63, Winter.
    19. Jeanine Miklós-Thal, 2012. "Linking reputations through umbrella branding," Quantitative Marketing and Economics (QME), Springer, vol. 10(3), pages 335-374, September.
    20. Fishman, Arthur & Finkelstein, Israel & Simhon, Avi & Yacouel, Nira, 2018. "Collective brands," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 316-339.
    21. Jungju Yu, 2021. "A Model of Brand Architecture Choice: A House of Brands vs. A Branded House," Marketing Science, INFORMS, vol. 40(1), pages 147-167, January.
    22. Miklos-Thal, Jeanine, 2008. "Linking Reputations: The Signaling and Feedback Effects of Umbrella Branding," MPRA Paper 11045, University Library of Munich, Germany.
    23. Gerhard O. Orosel & Klaus G. Zauner, 2011. "Quality Diversity and Prices in Markets for Experience Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 709-738, September.
    24. Eric Rasmusen, 2011. "Leveraging of Reputation Through Umbrella Branding with and Without Market Power," Working Papers 2011-07, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    25. Kashmiri, Saim & Mahajan, Vijay, 2010. "What's in a name?," International Journal of Research in Marketing, Elsevier, vol. 27(3), pages 271-280.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jeanine Miklós-Thal, 2012. "Linking reputations through umbrella branding," Quantitative Marketing and Economics (QME), Springer, vol. 10(3), pages 335-374, September.
    2. Miklos-Thal, Jeanine, 2008. "Linking Reputations: The Signaling and Feedback Effects of Umbrella Branding," MPRA Paper 11045, University Library of Munich, Germany.
    3. Hakenes, Hendrik & Peitz, Martin, 2008. "Umbrella branding and the provision of quality," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 546-556, March.
    4. Eric Rasmusen, 2011. "Leveraging of Reputation Through Umbrella Branding with and Without Market Power," Working Papers 2011-07, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    5. Sridhar Moorthy, 2012. "Can Brand Extension Signal Product Quality?," Marketing Science, INFORMS, vol. 31(5), pages 756-770, September.
    6. Cabral, L.M.B., 2001. "Optimal Brand Umbrella Size," New York University, Leonard N. Stern School Finance Department Working Paper Seires 01-06, New York University, Leonard N. Stern School of Business-.
    7. Jungju Yu, 2021. "A Model of Brand Architecture Choice: A House of Brands vs. A Branded House," Marketing Science, INFORMS, vol. 40(1), pages 147-167, January.
    8. Hongbin Cai & Ichiro Obara, 2009. "Firm reputation and horizontal integration," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 340-363, June.
    9. Fishman, Arthur & Finkelstein, Israel & Simhon, Avi & Yacouel, Nira, 2018. "Collective brands," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 316-339.
    10. Hongbin Cai & Ichiro Obara, 2009. "Firm reputation and horizontal integration," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 340-363, June.
    11. Hakenes, Hendrik & Peitz, Martin, 2009. "Umbrella branding and external certification," European Economic Review, Elsevier, vol. 53(2), pages 186-196, February.
    12. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    13. J.-P. Niinimäki, 2023. "Experience Goods, Umbrella Branding, and Reputation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(1), pages 33-44, February.
    14. Olivier Gergaud & Florine Livat, 2004. "Team versus individual reputations: a model of interaction and some empirical evidence," Cahiers de la Maison des Sciences Economiques bla04015, Université Panthéon-Sorbonne (Paris 1).
    15. Zvika Neeman & Aniko Öry & Jungju Yu, 2019. "The benefit of collective reputation," RAND Journal of Economics, RAND Corporation, vol. 50(4), pages 787-821, December.
    16. Fishman, Arthur & Finkelshtain, Israel & Simhon, Avi & Yacouel, Nira, 2008. "The Economics of Collective Brands," Discussion Papers 46056, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
    17. Luigi Luini & Andrea Mangani, 2004. "Trademarks, Product Variety, and Economic Activity in Italy and Europe," Department of Economics University of Siena 422, Department of Economics, University of Siena.
    18. Ichiro Obara, 2004. "Firm Reputation and Horizontal Integration (with H. Cai)," UCLA Economics Online Papers 318, UCLA Department of Economics.
    19. Thomas Liebi, 2002. "Monitoring Eco-Labels: You Can Have Too Much of a Good Thing," Diskussionsschriften dp0207, Universitaet Bern, Departement Volkswirtschaft.
    20. Eric B. Rasmusen, 2016. "Leveraging of Reputation through Umbrella Branding: The Implications for Market Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(2), pages 261-273, April.

    More about this item

    Keywords

    Branding Repeated games Reputation;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:27:y:2009:i:2:p:206-213. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505551 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.