Quality Provision, Expected Firm Altruism and Brand Extensions
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.
I wish to thanks Mary Burke, Stephan Meier and Christina Wang for conversations and the Harvard Business School Division of Research for support. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Rotemberg, Julio J. "Expected Firm Altruism, Quality Provision, and Brand Extensions." Marketing Science 32, no. 2 (March–April 2013): 325–341.