Risk Reduction and Umbrella Branding

Abstract

In the context of competitive markets with asymmetric information, the authors develop a model of firms' branding decisions. In equilibrium, both branded and unbranded products exist, and the authors characterize price-quality relationships between them. In contrast to other advertising models, they predict that branded products will have lower average (price-adjusted) quality than unbranded products. This lower average is counterbalanced by lower variance in product quality, giving branding a risk-reducing rather than a quality-guaranteeing functions. The authors describe industries in which these relationships are likely to be stronger and test the predictions using Consumer Reports data on quality and price. Copyright 1992 by University of Chicago Press.