STRATEGY AND BUSINESS ECONOMICS


Branding Vertical Product Line Extensions


THOMAS JUNGBAUER ASSISTANT PROFESSOR


Samuel Curtis Johnson Graduate School of Management


Cornell SC Johnson College of Business Cornell University


Co-authors • Tomas Jungbauer


Assistant Professor, Samuel Curtis Johnson Graduate School


of Management, Cornell SC Johnson College of Business, Cornell University • Christian Schmid, LMU Munich School of Management, Munich, Germany


Summary It is the norm for firms to produce multiple goods, and those selling verti-


cally differentiated products infrequently roll out multiple products at the same time. Often a firm already selling a well-established product decides to expand upward or downward and then needs to decide whether to introduce the new product under an existing brand. In this paper, the authors develop a game-theoretic model in which firms expand their product line to cater to a different customer segment, choosing their branding strategy, new product quality, and prices.


Tey find that the firm’s optimal branding strategy depends on both the verti- cal direction of the expansion and the level of competition, and they identify a novel interaction effect between these factors. In particular, firms engaged in direct competition employ branding as a commitment device to soften quality competition. When these firms extend their product line upwards, this creates a misalignment between firms’ actions and consumer preferences. Te au- thors also derive conditions under which firms, against conventional wisdom, choose to differentiate their products more when selling them under the same brand. Finally, they characterize the welfare effects of branding in this setting, and argue that their findings are consistent with observations from the car industry.


Journal of Economics and Management Strategy, 33, 4, Winter 2024 LINK TO PAPER


CONTENTS TO MAIN


| RESEARCH WITH IMPACT: CORNELL SC JOHNSON COLLEGE OF BUSINESS • 2024 EDITION


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