Optimal Brand Umbrella Size

Abstract

In a framework or repeated-purchase experience goods with seller’s moral hazard 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. Against these 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.