Working Paper | 2010

Quality Provision, Expected Firm Altruism and Brand Extensions

by Julio J. Rotemberg

Abstract

This paper studies quality choice in a model where consumers expect firms to act altruistically. It is shown that, under plausible assumptions regarding this altruism and the reaction of consumers to firms that demonstrate insufficient altruism, existing firms (or 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. Lastly, the model can explain why a "high-end" firm that is expected to care only for its most quality sensitive customers can have an advantage in introducing a product relative to a firm that is expected to be more widely altruistic.

Keywords: Brands and Branding; Consumer Behavior; Product Development; Corporate Social Responsibility and Impact; Quality; Mathematical Methods;

Citation:

Rotemberg, Julio J. "Quality Provision, Expected Firm Altruism and Brand Extensions." NBER Working Paper Series, No. 15635, January 2010.