Stretching Firm and Brand Reputation

26 Pages Posted: 31 Oct 2008

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

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Date Written: 2000

Abstract

I consider an adverse selection model of ¯rm reputation. Each firm is characterized by anexogenously given quality level, which is the firm's private information and applies to any product it sells. Consumers observe the performance of the firm's products, which is positively related to the firm's quality level. The firm's reputation is given by the consumers' posterior on the firm's quality level given the firm's performance history. I address the following question: if a firm is to launch a new product, should it use the same name as its base product (reputation stretching), or should it create a new name (and start a new reputation history)? I show that, for a given level of reputation, firms stretch if and only if quality is sufficiently high. As a consequence, stretching signals high quality. If the new product is relatively profitable compared to the base product, then, for a given level of quality, firms stretch if and only if reputation is high (i.e., firms exploitgood reputations). Conversely, if the new product is relatively unprofitable compared to the base product, then, for a given level of quality, firms stretch if and only if reputation is low (i.e., firms protect good reputations).

Suggested Citation

Cabral, Luis M. B., Stretching Firm and Brand Reputation (2000). NYU Working Paper No. EC-00-07. Available at SSRN: https://ssrn.com/abstract=1292686

Luis M. B. Cabral (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

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HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

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