Umbrella branding with imperfect observability and moral.pdfVIP

International Journal of Industrial Organization 27 (2009) 206–213 Contents lists available at ScienceDirect International Journal of Industrial Organization journa l homepage: /locate/ij io Umbrella branding with imperfect observability and moral hazard Luís M.B. Cabral 1 New York University, Stern School of Business, 44 West 4th Street, New York, NY 10016, United States a r t i c l e i n f o a b s t r a c t Article history: In a framework of repeated-purchase experience goods with sellers moral hazard and imperfect monitoring, Received 12 April 2007 umbrella branding may improve the terms of the implicit contract between seller and buyers, whereby the seller Received in revised form 2 July 2008 invests in quality and buyers pay a high price. In some cases, umbrella branding leads to a softer punishment of Accepted 10 July 2008 product failure, which increases the sellers value. In other cases, umbrella branding leads to a harsher Available online 17 July 2008 punishment of product failure, which allows for a reputational equilibrium that would otherwise be impossible. JEL classifi cation: On the negative side, under umbrella branding one bad signal may kill two revenue streams, not one. Combining C7 costs and benefits, I determine the set of parameter values such that umbrella branding is an optimal strategy. L0