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Umbrella branding and the provision of quality

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  • Hakenes, Hendrik
  • Peitz, Martin

Abstract

Consider a two-product firm that decides on the quality of each product. Product quality is unknown to consumers. If the firm sells both products under the same brand name, consumers adjust their beliefs about quality subject to the performance of both products. We show that if the probability that low quality will be detected is in an intermediate range, the firm produces high quality under umbrella branding whereas it would sell low quality in the absence of umbrella branding. Hence, umbrella branding mitigates the moral hazard problem. We also find that umbrella branding survives in asymmetric markets and that one product may even be sold at a loss to stabilize the umbrella brand. In general, umbrella branding does not necessarily imply high quality; the firm may choose low-quality products with positive probability.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:indorg:v:26:y:2008:i:2:p:546-556
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jeanine Miklós-Thal, 2012. "Linking reputations through umbrella branding," Quantitative Marketing and Economics (QME), Springer, vol. 10(3), pages 335-374, September.
    2. Nadja Silberhorn & Yasemin Boztuğ & Lutz Hildebrandt, 2017. "Does umbrella branding really work? Investigating cross-category brand loyalty," Journal of Business Economics, Springer, vol. 87(3), pages 397-420, April.
    3. 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.
    4. Luis M. B. Cabral, 2001. "Optimal Brand Umbrella Size," Working Papers 01-06, New York University, Leonard N. Stern School of Business, Department of Economics.
    5. Sridhar Moorthy, 2012. "Can Brand Extension Signal Product Quality?," Marketing Science, INFORMS, vol. 31(5), pages 756-770, September.
    6. Miklos-Thal, Jeanine, 2008. "Linking Reputations: The Signaling and Feedback Effects of Umbrella Branding," MPRA Paper 11045, University Library of Munich, Germany.
    7. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, May.
    8. Hakenes, Hendrik & Peitz, Martin, 2009. "Umbrella branding and external certification," European Economic Review, Elsevier, vol. 53(2), pages 186-196, February.
    9. Choi, Jay Pil & Peitz, Martin, 2016. "You are judged by the company you keep : reputation leverage in vertically related markets," Working Papers 16-07, University of Mannheim, Department of Economics.
    10. 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.
    11. Drasko Nikolic & Dusko Bodroza, 2012. "Positioning and Re-positioning of National Brand of Serbia in order to Increase to Increase Exports, Foreign Direct Investments and Tourism Development," Book Chapters, Institute of Economic Sciences.
    12. Guha, Brishti, 2016. "Moral Hazard, Bertrand Competition, and Natural Monopoly," MPRA Paper 70966, University Library of Munich, Germany.
    13. repec:kap:jeczfn:v:121:y:2017:i:2:d:10.1007_s00712-017-0527-7 is not listed on IDEAS
    14. Nadja Silberhorn & Lutz Hildebrandt, 2012. "Does umbrella branding really work? Investigating cross-category brand loyalty," SFB 649 Discussion Papers SFB649DP2012-028, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    15. Garcia, Daniel, 2014. "Branding and Collusion in Vertically Differentiated Industries," MPRA Paper 54010, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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