Quality signaling through advertising and brand extension in multiproduct firms

• Autor(a) principal: Lopes, Margarida Catalão
• Data de Publicação: 2000
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.5/22737
• topic: Advertising; Strategic Marketing; Multiproduct Firms; Product Quality; Game Theory; Consumer Behavior

We consider the use of advertising expenses as a signal of product quality in a model where quality is exogenously given and a priori unobservable by consumers. Our focus is on multiproduct firms, who may benefit from spillover effects from quality signaling. Quality is known to be positively correlated across the various products that the firm sells. Signaling the quality of a product may help in solving the information problems in markets where the firm does not separate. As a result of this informational leverage effect advertising levels per market are at least as high in multiproduct firms as in single product firms, and net profits may be high, too. We also derive some conclusions on the optimal timing for a multiproduct firm (and for the society, as well) for signaling quality. Extending a brand may be used as a signal of quality correlation between two distinct products of the same firm; we find equilibria in which a firm with a good reputation for quality uses the same name for all products if and only if it knows of a high quality correlation between them (products within the same class), and in which this firm uses different names if and only if quality correlation is low (products of different classes) .