Branding Vertically Differentiated Product Lines: Branded House vs. House of Brands

The decision whether a multi-product firm offers its goods under a joint or separate brands is essential for its success. When selling vertically differentiated products, it needs to consider the interplay of branding spillovers, pricing and cannibalization. We study the problem of a firm selling vertically differentiated products deciding whether to sell its products under a joint or separate brands. The analysis accounts for the positive and negative spillover effects between jointly branded products previously established in the literature. Our findings suggest that joint branding is optimal when spillover effects are either high or low but not when they are intermediate. When spillover effects are low, firms jointly brand to save the cost of building a second brand. In contrast, when spillover effects are high, the firm chooses joints branding because it is inherently more profitable even if building additional brands is free. When spillover effects are intermediate, however, firms opt for separate branding despite the additional cost of building more brands. We also extend the analysis to investigate the effect of low-end strategic competition and find that this kind of competition pushes the multi-product line firm towards joint branding. Finally, our modeling approach explains why some firm use hybrid (endorsed) branding to dampen the spillover effects compared to pure joint branding.