Selling When Brand Image Matters

Abstract

This paper studies profit-maximizing seller behavior when brand image affects consumer demand. We consider a seller facing a population of consumers with heterogeneous tastes regarding product quality and brand image. First, we analyze 'active branding' by the seller through costly advertising. Our analysis shows that advertising, price and profits are all increasing in the average valuation of brand image in the population. Second, we examine the role of 'passive branding' emanating from the population’s consumption of the product. We demonstrate that seller profits increase in the average degree of conformity in the population whereas the price remains unaffected.

Keywords: quality, brand image, advertising, conformity, exclusivity

JEL Classification: D42, L15, L21, M37