Working Paper: NBER ID: w15635
Authors: Julio J. Rotemberg
Abstract: This paper studies quality choice in a model where consumers expect firms (or brands) to act altruistically. Under plausible assumptions regarding this altruism and the reaction of consumers to firms that demonstrate insufficient altruism, existing brands can face a larger demand for new products than new entrants. Moreover, the failure of new products can reduce the demand for a brand's existing products even if the quality of these existing products is well understood by consumers. The model provides an interpretation for the dependence of the success of brand extensions on the ``fit" between the original product and the extension. The model can also explain why a ``high-end" brand that is expected to care only for its most quality sensitive customers can have an advantage in introducing a product relative to a brand that is expected to be more widely altruistic.
Keywords: Altruism; Brand Extensions; Quality Provision
JEL Codes: D64; L15; L21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected firm altruism (D64) | quality provision (L15) |
| quality provision (L15) | consumer expectations of new products (L15) |
| quality provision (L15) | demand for existing products (J23) |
| consumer expectations of firm altruism (L21) | quality of new products (L15) |
| perceived fit between brand and extension (L15) | consumer acceptance (D16) |
| high-end brand quality sensitivity (L15) | advantage in launching new products (O36) |