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Umbrella Branding as a Signal of New Product Quality: An Example of Signalling by Posting a Bond

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  • Birger Wernerfelt

Abstract

I present a signalling model in which a multiproduct firm can use its reputation as a bond for quality by using a brand name for an established product when it introduces a new experience good. As out-of-equilibrium beliefs are specified, a false signal may be taken to imply that both the established and the new product are of low quality. In contrast, the absence of a signal leaves open the possibility that one of the two products is of high quality. Hence, the signal can be credible without excessive sunk costs, as long as the bond posted is sufficiently large.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 19 (1988)
Issue (Month): 3 (Autumn)
Pages: 458-466

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Handle: RePEc:rje:randje:v:19:y:1988:i:autumn:p:458-466

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Cited by:
  1. Julio J. Rotemberg, 2010. "Quality Provision, Expected Firm Altruism and Brand Extensions," NBER Working Papers 15635, National Bureau of Economic Research, Inc.
  2. F. Magnoni & Elyette Roux, 2011. "Stretching a luxury brand down: An experimental study of core brand dilution effects," Post-Print halshs-00644899, HAL.
  3. Mark Ritson & Mark Zbaracki & Shantanu Dutta & Daniel Levy & Mark Bergen, 2005. "The Three Capitals of Pricing – Human, Systems and Social Capital," Macroeconomics 0505014, EconWPA.
  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. Steve Tadelis, 1997. "What's in a Name? Reputation as a Tradeable Asset," Working Papers 97033, Stanford University, Department of Economics.
  6. Fabrice Larceneux & Florence Benoît-Moreau & Valérie Renaudin, 2012. "Why Might Organic Labels Fail to Influence Consumer Choices? Marginal Labelling and Brand Equity Effects," Post-Print hal-00656485, HAL.
  7. 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.
  8. Justus Haucap & Christian Wey & Jens Barmbold, 1998. "Location Costs, Product Quality, and Implicit Franchise Contracts," CIG Working Papers FS IV 98-08, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  9. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
  10. Erik Durbin, 2000. "McDonald's or the Michelin Guide? Revealing Quality Through Private-Sector Certification," Econometric Society World Congress 2000 Contributed Papers 1097, Econometric Society.
  11. Carlyle Farrell & Gervan Fearon, 2005. "Renting Goodwill in International Marketing Channels: An Analysis of Pricing Strategies and Bargaining Power," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(3), pages 285-296, September.
  12. Chatterjee, Subimal & Kang, Yong Soon & Mishra, Debi Prasad, 2005. "Market signals and relative preference: the moderating effects of conflicting information, decision focus, and need for cognition," Journal of Business Research, Elsevier, vol. 58(10), pages 1362-1370, October.
  13. Cynthia A. Montgomery, 1994. "Corporate Diversificaton," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 163-178, Summer.
  14. Choi, Jay Pil, 2003. "Bundling new products with old to signal quality, with application to the sequencing of new products," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1179-1200, October.
  15. Jeanine Miklós-Thal, 2012. "Linking reputations through umbrella branding," Quantitative Marketing and Economics, Springer, vol. 10(3), pages 335-374, September.
  16. Raghuram Iyengar & Asim Ansari & Sunil Gupta, 2003. "Leveraging Information Across Categories," Quantitative Marketing and Economics, Springer, vol. 1(4), pages 425-465, December.
  17. Brynjolfsson, Erik & Dick, Astrid Andrea & Smith, Michael D., 2004. "Search and Product Differentiation at an Internet Shopbot," Working papers 4441-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  18. Rao, Akshay R. & Mahi, Humaira, 2000. "Slotting Allowances: Empirical Evidence On Their Role In New Product Launches," Working Papers 14348, University of Minnesota, The Food Industry Center.
  19. Fabrice Larceneux & Florence Benoit-Moreau & Valérie Renaudin, 2012. "Why Might Organic Labels Fail to Influence Consumer Choices? Marginal Labelling and Brand Equity Effects," Journal of Consumer Policy, Springer, vol. 35(1), pages 85-104, March.
  20. Pina, José M. & Dall'Olmo Riley, Francesca & Lomax, Wendy, 2013. "Generalizing spillover effects of goods and service brand extensions: A meta-analysis approach," Journal of Business Research, Elsevier, vol. 66(9), pages 1411-1419.

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