Experience Goods, Umbrella Branding, and Reputation

Abstract

This paper examines umbrella brands—brand stretching or brand extension—in a model of experience goods and an infinite number of periods. A monopoly firm has short-run incentives to compromise on product quality so as to save costs, as buyers can observe quality only ex post. The paper shows that the overlapping structure of product launching strengthens umbrella branding, mitigates moral hazard, and makes easier the building of a good reputation and its maintenance. The overlapping structure generates switching costs between strategies.