RISK REDUCTION AND UMBRELLA BRANDING

In the context of competitive markets with asymmetric information, we develop a model of firms' branding decisions. In equilibrium, both branded and unbranded products exist, and we characterize price-quality relationships between them. In contrast to other advertising models, we 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 function. We describe industries in which these relationships are likely to be stronger and test the predictions using Consumer Reports data on quality and price.