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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26225
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| Title: | Stretching Firm and Brand Reputation |
| Authors: | Cabral, Luis M.B. |
| Issue Date: | 2000 |
| Series/Report no.: | EC-00-07 |
| Abstract: | I consider an adverse selection model of ¯rm reputation. Each firm
is characterized by an exogenously 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 exploit good 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). |
| URI: | http://hdl.handle.net/2451/26225 |
| Appears in Collections: | Economics Working Papers
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