A Model of Brand Architecture Choice : A House of Brands vs. A Branded House

Some firms that operate in multiple product markets use the same brand in different markets, whereas others use different brands in different markets. This research investigates in which product markets a firm should use the same or different brands and how this decision depends on the relatedness of product markets. To answer this question, I propose a framework of market relatedness that characterizes the relationships among distinct product markets from the supply side (e.g., shared production technology) and demand side (e.g., correlated customer preferences). This framework is applied to a model of reputation in which a multiproduct firm’s product quality is jointly determined by its hidden capability type (i.e., adverse selection) and hidden choice of effort level (i.e., moral hazard) in each product market. Consumers obtain noisy information about the firm by observing its track record, that is, product quality produced in the past. Umbrella branding allows consumers to pool the firm’s track record across different product markets and form expectations about the product quality based on market relatedness. The analysis shows that umbrella branding is optimal if supply-side relatedness is high and demand-side relatedness is not too high. However, if the product markets are closely related in both dimensions, then independent branding may be optimal because, as an umbrella brand, the firm faces a temptation to exploit positive information spillover across product markets through its shared brand name. By using different brand names, a firm can credibly commit to investing in all product markets and thereby earn higher profits. Finally, this paper provides implications for an umbrella brand’s customer relationship management strategy whether to serve the same or distinct customer segments with its products.