Abstract
Some firms that operate in multiple product markets use the same brand in different markets, while others use distinct brands. This research investigates for which product markets a firm should use the same or different brands, and how this decision depends on the relatedness between product markets. To answer this question, I propose a framework of market-relatedness which characterizes the relationship between distinct product markets through supply-side (e.g., shared production technology) and demand- side (e.g., correlated customer preferences). This framework is applied to a model of reputation in which a multi-product of can make costly investments, hoping to credibly convey information about its unobserved capability types (i.e., adverse selection), as well as its unobserved quality investments (i.e., moral hazard) in each product market. Consumers obtain information about the firm by observing the firm’s track record, i.e., noisy signals of past investment decisions. I find that umbrella branding is optimal if the supply-side relatedness is high and demand-relatedness is not too high. However, if product markets are closely related on both dimensions, independent branding can be optimal. This is because, as an umbrella brand, the firm faces a temptation to exploit positive information spillovers across product markets through the shared brand name. By using different brand names, a firm can credibly commit to investing in all product markets and thus gain greater profits. This paper also provides implications for an umbrella brand’s optimal customer relationship management strategy.
Published Version
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