1. Some have termed this monetary value “brand equity,” and the concept has begun to receive considerable scrutiny. NutraSweet is concerned about its brand equity since the patent on aspartame has expired, as is ITC (formerly the Imperial Tobacco Company, headquartered in Calcutta, India) in the wake of increasing brand proliferation and price-based competition. For an informative exposition, see:
D.A. Aaker, Managing Brand Equity (New York: Free Press, 1991).
2. Our prescriptions are based on an extensive survey of the academic literature on brand management and strategic alliances, as well as a number of discussions with executives from numerous corporations including the NutraSweet Company, Pillsbury (Grand Metropolitan), 3M, Leo Burnett, and Montgomery Ward.
3. Of course, brands do much more than provide information about intrinsic product quality. A significant literature base rooted in psychology persuasively argues that brand names develop associations, images, and personalities. For the original discussion of the symbolic value of brand names, see:
B.B. Gardner and S.J. Levy, “The Product and the Brand,” Harvard Business Review, March–April 1955, pp. 33–39.
4. That brand name has a significant impact on perceptions of product quality has often been demonstrated. See:
A.R. Rao and K.B. Monroe, “The Effect of Price, Brand Name, and Store Name on Buyers’ Perceptions of Product Quality: An Integrative Review,” Journal of Marketing Research 26 (1989): 351–357.
5. The humorous story goes on to describe how buyers also relied on the date of manufacture for a quality cue; units manufactured just before or after weekends were likely to be of suspect quality because, as a consequence of widespread alcoholism, workers were either preparing to drink heavily or were recovering from drinking heavily.
6. G.A. Akerlof, “The Market for ‘Lemons’: Quality under Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84 (1970): 448–500.
7. Our use of terms such as “cheat” and “fraud” is not intended to be pejorative. Rather, it is consistent with the vernacular in information economics and is intended to be descriptive.
8. Information economics deals with two broad classes of problems that occur when transacting parties are differentially informed about some key element of the transaction. In this paper, we address the first problem, that of adverse selection. In general, adverse selection problems are concerned with precontractual issues of determining the type of a vendor (high- or low-quality, for instance) or employee (high or low intelligence), when the true level of the attribute (quality or intelligence) is unobservable and immutable. The second problem, that of moral hazard (sometimes termed the hidden action problem), is concerned with ensuring that transacting parties act in a manner consistent with their original commitments. In general, moral hazard problems are concerned with postcontractual issues of ensuring that a vendor or employee continue to deliver high quality and continue not to shirk, respectively, when their actions are not easy to monitor. For descriptive, analytical, and empirical treatments, respectively, see:
M.E. Bergen, S. Dutta, and O.C. Walker, Jr., “Agency Relationships in Marketing: A Review of the Implications and Applications of Agency-Related Theories,” Journal of Marketing 56 (1991): 1–24;
D.M. Kreps, A Course in Microeconomic Theory (Princeton, New Jersey: Princeton University Press, 1991); and
A.R. Rao and M.E. Bergen, “Price Premium Variations as a Consequence of Buyers’ Lack of Information,” Journal of Consumer Research 18 (1992): 412–423.
9. Clearly, this strategy will only work if the provision of a good warranty by a poor-quality seller raises its costs (and price) to a level higher than that of the high-quality seller. This cost structure allows for high- and low-quality sellers to be separated from each other. If the poor-quality seller can offer a good warranty and successfully absorb the higher costs of warranty fulfillment through charging a higher price (which is still lower than that of the high-quality seller), then warranties will not be a successful signal of quality. Price, advertising, scale of operations, and many other devices have been shown to be good signals of quality under certain conditions. See:
S.J. Grossman, “The Informational Role of Warranties and Private Disclosure about Product Quality,” Journal of Law and Economics 24 (1981): 461–483;
R. Cooper and T.W. Ross, “Product Warranties and Double Moral Hazard,” Rand Journal of Economics 16 (1985): 103–113; and
T.M. Devinney, “Price, Advertising, and Scale as Information-Revelation Mechanisms in Product Markets,” in Issues in Pricing, ed. T.M. Devinney (New York: Lexington Books, 1988), pp. 63–82.
10. Aaker (1991).
11. In a mathematically elegant paper on the topic, Birger Wernerfelt makes the same point by showing how “sending a false signal puts a player in a worse situation from then on than if he had sent no signal.” See:
B. Wernerfelt, “Umbrella Branding as a Signal of New Product Quality: An Example of Signaling by Posting a Bond,” Rand Journal of Economics 19 (1988): 458–466.
12. We are restricting ourselves to alliances that are an appropriate fit in terms of consistency of meaning and context. Therefore, while Godiva and Vlasic are strong names in their respective product categories, they probably do not fit well. In other words, adding anchovies to peanut butter, regardless of how well one likes anchovies and/or peanut butter, is probably not a good idea.
13. The term “reputation” is used in a very specific sense here. A reputable firm is one that will suffer a monetarily adverse consequence in the event of poor quality. The greater a firm’s reputation, the greater the monetary damage that can be inflicted on that firm. An important corollary to this thinking is that the greater the vulnerability of a brand name, the more credible its claim of quality. Consequently, the more damage that can be done to a brand name if it is discovered to have debased quality, the more likely that it can successfully offer itself as a hostage when jointly branded with other brands. This corollary has important implications for the selection of allies.
14. D. Kiley, “Big Brands Unite on New Products,” Adweek’s Marketing Week, 1 July 1991, p. 10.
15. This nomenclature is intended to be descriptive and is not intended to convey a rank order of brands. For the significance of the Diet Coke decision to Coca-Cola, see:
J. Guyon and J. Long, “Coke to Put Much-Cherished Trademark on Diet Cola, in a $100 Million Campaign,” Wall Street Journal, 9 July 1982, p. 5.
16. Several other potential costs are more psychological in nature. For instance, what is the impact of multiple alliances on the current image of the secondary brand? Do such multiple “marriages” lessen the sharpness of the definition of this brand? For an expanded presentation, see:
Aaker (1991).
17. Managing brand concepts and linking them with the appropriate image are among managers’ more important tasks. Building psychological barriers to entry by developing an invisible bond between brands and consumers through the proper management of a brand’s concept over time is expected to enhance the brand’s market performance. See:
C.W. Park, B.J. Jaworski, and D.J. MacInnis, “Strategic Brand Concept-Image Management,” Journal of Marketing 50 (1986): 135–145.
18. B.G. Yovovich, “What Is Your Brand Really Worth?” Adweek’s Marketing Week, 8 August 1988, pp. 18–24.
19. For one example, see:
Rao and Bergen (1992).
20. For an application of this approach to whether a firm should employ a salesperson or rely on independent agents/distributors, see: E. Anderson and B.A. Weitz, “Make-or-Buy Decision: Vertical Integration and Marketing Productivity,” Sloan Management Review, Spring 1986, pp. 3–18.
21. For an application of transaction cost economics to salesforce compensation plans, and for a lucid description of transaction cost economics, see:
G. John and B.A. Weitz, “An Empirical Investigation of Factors Related to the Use of Salary Versus Incentive Compensation,” Journal of Marketing Research 26 (1989): 1–14.
For an original discussion of transaction cost economics, see:
O. Williamson, “The Economics of Organization: The Transaction Cost Approach,” American Journal of Sociology 87 (1981): 548–577.
22. For an example of the application of psychological theories to branding issues, see:
B. Loken and D.R. John, “Diluting Brand Beliefs: When Do Brand Extensions Have a Negative Impact?” Journal of Marketing 57 (1993): 71–84.
