Stretching Firm and Brand Reputation

Luis Cabral

RAND Journal of Economics, 2000, vol. 31, issue 4, 658-673

Abstract: I consider an adverse selection model of product quality. Consumers observe the performance of the firm's products, and product performance is positively related to the firm's (privately observed) quality level. If a firm is to launch a new product, should it use the same name as its base product (reputation stretching), or should it create a new name (and start a new reputation history)? I show that for a given level of past performance (reputation), firms stretch if and only if quality is sufficiently high. Stretching thus signals high quality.

Date: 2000
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