Optimal Brand Umbrella Size
19 Pages Posted: 31 Oct 2008
Date Written: April 2007
In a framework or repeated-purchase experience goods with seller s moralhazard 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. The benefits from umbrella branding may come from one of two sources: 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 an equilibrium where buyers trust in the seller s brand. Againstthese benefits, one must consider the costs of umbrella branding, namely that, in some cases, a bad signal in one product kills two streams of revenue and profit. Combining costs and benefits, I determine the set of parameter values where umbrella branding is an optimal strategy.
Keywords: branding, repeated games
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