To Brand or Not to Brand? A Theoretical and Empirical Question

Abstract

A firm's brand name is a valuable asset that can greatly enhance the demand for its products. This fact is widely recognized in both the economics and marketing literatures. Surprisingly, though, little rigorous analysis has been devoted by either of these literatures to the question of when a firm will identify one of its new products with an established brand name. It is on this question that our research is focused. The economics literature in this general area has focused on issues that are related to but quite distinct from the issue we examine. The traditional industrial organization literature discusses and attempts to capture empirically the relationships among advertising, brand names, and market power. (For some representative work We develop and test a model that predicts (1) whether a multiproduct firm will brand a new product with the established company name and (2) where the new product will be located in relation to the reputation estabished by the firm in other markets. Hotelling's (1929) model of spatial location serves as the basis for our theoretical investigation. However, we extend Hotelling's model to the case of experience goods whose qualities can only be known with certainty after the product is purchased and consumed. The logic that underlies our model is tested on a sample of firms from the U.S. liquor industry. We employ a mixed logit approach to capture the simultaneous decisions that are made by the firms in our sample. * The views expressed in this paper are our own, and not necessarily those of the Bell System. We are grateful to 0. Gur-Arie, the Michigan Liquor Control Commission, Peter Ochshorn, and Srinivasan Balakrishnan for valuable assistance with data collection and programming, and to the National Science Foundation for support through grant IST 8315690. The helpful comments of Roger Klein, Pablo Spiller, and an anonymous referee are also gratefully acknowledged. Any errors are, of course, our responsibility.