Leveraging of Reputation through Umbrella Branding: The Implications for Market Structure

• Date: 01 April 2016
• DOI: http://doi.org/10.1111/jems.12145
• Published date: 01 April 2016
• Author: Eric B. Rasmusen

Leveraging of Reputation through Umbrella

Branding: The Implications for Market Structure

ERIC B. RASMUSEN

Harvard Law School

Harvard Department of Economics, and Department of Business Economics and Public Policy

Kelley School of Business

Indiana University

BU 438, 1309 E. 10th Street, Bloomington IN 47405-1701

erasmuse@indiana.edu

The Klein–Leffler model explains how fear of reputation loss can induce firms to produce high-

quality experience goods. This paper shows that reputation can be leveraged across products via

umbrella branding, but only by a firm with a monopoly on at least one product. Such a firm may

be able to capture a market by using umbrella branding to make high quality credible at a lower

price than the incumbent competitive firms. If monopolists compete for this capture, consumers

are left better off than if the market remained competitive, in some cases even though the price

increases.

1. Introduction

Umbrella branding is the practice of labeling more than one productunder a single brand

name. Kellogg’s and General Electric are natural umbrella brands because they apply

to products that are similar—breakfast cereals in the one case, household appliances in

the other. But what about GE jet engines? Sometimes a brand will be applied to wildly

dissimilar products. VuarnetInternational sells sunglasses, skis, pens, and clothing. Vir-

gin Records extended the name of its brand of phonograph record to airline services,

vodka, and soft drinks. Andersson (2002) notes that the founder of Virgin, RichardBran-

son, said “Consumers understand that all the values that apply to one product—good

service, style, quality, value and fair dealing—apply to the others.” (Time Magazine,No.

26, June 1996) Executives at LG and Sony say: “The LG logo and motto are strong icons

that connect everything together. Consumers take those beliefs and brand equity with

them to the checkout as a source of reassurance,” and “Everything we do now runs

under a common identity; people know Sony and they believe the brand values of the

master brand. Therefore, they feel reassured about what they are buying. The umbrella

branding gives us a meaning, not just a logo.” (“Talkingshop: Umbrella branding,” Mar-

keting Week, Nov. 12. 2009, http://www.marketingweek.co.uk/talking-shop-umbrella-

branding/3006453.article.) On the other hand, umbrella branding backfires if consumers

are disappointed by the quality of one of the products under the umbrella. Swaminathan

et al. (2001) analyzed scanner data on the products of a grocery food company with a

I thank Yiquan Gu, Dan Klerman, Jeanine Miklos-Thal, David Myatt, Kevin Seok, Claire Zheng, two anony-

mous referees, and participants in talks at the Indiana BEPP brown bag lunch, the University of Louisville,

and the 7th International Industrial Organization Conference for their comments. I also thank NuffieldCollege

(Oxford), Harvard Law School, and the Harvard Department of Economics for their hospitality at various

stages of the writing.

C2015 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume25, Number 2, Summer 2016, 261–273