On the Signaling and Feedback Effects of Umbrella Branding

Abstract

I consider an adverse selection model of product quality to analyze a firm's incentives to sell different products under an umbrella brand. My main result is that umbrella branding can signal positive quality correlation to consumers, even in the absence of any exogenous "technological" correlation between the products concerned. In any equilibrium with positive endogenous quality correlation, the decision to umbrella brand has a positive signaling effect on the price consumers are willing to pay for at least one of the products. Moreover, subsequent successes (failures) of either of the products have positive (negative) feedback effects on the other product. For such equilibria to exist, it is necessary that (i) consumers' prior information about product qualities is limited, (ii)the markets for the different products are sufficiently symmetric, (iii) potential quality differences are substantial, and (iv) firms attach sufficient weight to repeat sales of all products. There are no equilibria in which umbrella branding either fully certifies high quality, or signals negative quality correlation.