“Branding Vertical Product Line Extensions,” a paper with Christian Schmid from U Vienna. We build a stylized model to analyze the optimal branding decision of a firm expanding its product line as a function of the vertical direction of the extension and the level of competition.
We assume that consumers are not only affected by the quality of the product they consume, but every product sold under the same brand. This relation may arise due to product confusion, conspicuous consumption, etc. The main result of the paper is that firms may employ branding as a commitment device to soften quality competition.
Under competition, firms do not recoup their full investment in R&D, advertisement, factories, etc. Therefore, they opt for the branding regime that minimizes investment. Interestingly, that means that firms often choose the branding regime preferred by consumers when expanding downwards but not when expanding upwards.
Our paper provides a potential explanation why in some markets we see firms successfully expanding downwards under an umbrella brand and upwards with individual brands (think Mercedes vs. Toyota/Lexus) and vice versa in other markets (GAP/Old Navy vs. Adidas).