Working Paper: CEPR ID: DP6601
Authors: Hendrik Hakenes; Martin Peitz
Abstract: In a market environment with random detection of product quality, a firm can employ umbrella branding as a strategy to convince consumers of the high quality of its products. Alternatively, a firm can rely on external certification of the quality of one or both of its products. We characterize equilibria in which umbrella branding fully or partially substitutes for external certification. We also show that the potential to signal quality is improved if consumers condition their beliefs on the source of information, namely whether information comes from external certification or from random detection.
Keywords: certification; signalling; umbrella branding
JEL Codes: D82; L14; L15; M37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Umbrella branding (M37) | consumer beliefs (D18) |
| Umbrella branding substitutes for external certification (L15) | profit-maximizing strategy (L21) |
| High-quality product certification (L15) | higher profits (D33) |
| Certified product serves as an anchor (Y20) | non-certified product under umbrella brand (L68) |
| Source of information conditioning (D83) | signaling potential of umbrella branding (M37) |