Umbrella Branding as a Signal of New Product Quality: An Example of Signalling by Posting a Bond

Abstract

I present a signalling model in which a multiproduct firm can use its reputation as a bond for quality by using a brand name for an established product when it introduces a new experience good. As out-of-equilibrium beliefs are specified, a false signal may be taken to imply that both the established and the new product are of low quality. In contrast, the absence of a signal leaves open the possibility that one of the two products is of high quality. Hence, the signal can be credible without excessive sunk costs, as long as the bond posted is sufficiently large.