Publication Date: January 2017
Revision Date: April 2018
We study a model of reputation with two long-lived ﬁrms that sell their products under a collective brand or under two diﬀerent individual brands. Firms face a moral hazard problem because their quality investments are not observed. Investments can only be sustained due to reputational concerns. In a collective brand, consumers cannot distinguish between the two ﬁrms. We show that in the long run, this makes it harder to establish a good reputation because of the incentives to free-ride on the other ﬁrm’s investments. But in the short run it mitigates the temptation to milk good reputation. Consequently, a collective brand can provide stronger incentives to invest in quality if ﬁrms are suﬀiciently impatient. We explain the connection between incentives and the type of industry in which the ﬁrms operate as captured by the underlying signal structure and consumers’ prior beliefs. We discuss the relation to country-of-origin labelling, agricultural cooperatives, and other collective brands.
Keywords: Branding, Collective reputation, Commitment, Country of origin