پیامدهای ناشی از تعامل برند برای قیمت گذاری چند محصول Implications of parent brand inertia for multiproduct pricing

1 Introduction Consumer packaged goods are frequently marketed under a brand name that encompasses a wide variety of both physical (size, package type) and taste attributes (low fat, enriched with fruit, etc.). The practice of umbrella branding is observed across many consumer products including durables (e.g. automobiles, electronics, computers) and services (e.g. TV shows, hotels). The usual interpretation of a brand name is one of product identity: brands are identifiable in consumers’ minds and they are associated with unique images that are both comparable and subject to preference rankings. Past exposure to a brand’s performance should guide a consumer’s purchase decision the next time they shop in a given product category. Several studies have established that a consumer’s most recent experience with a brand is an important factor in their next purchase decision (Seetharaman et al. 1999; Seetharaman 2004; Anand and Shachar 2004; Horsky and Pavlidis 2011). This type of persistence in demand (often described as state dependence or switching costs) has unique and complex implications for the pricing behavior of firms. While demandside state dependence has been studied in academic research extensively over the last two decades, the pricing side of the problem has received considerably less attention. In general, state dependence in the demand for frequently purchased goods has been found to create two countervailing forces on the equilibrium prices that forward looking firms may charge (Farrell and Klemperer 2007; Dube et al. ´ 2009). On one hand, it places an upward pressure on prices because consumers’ past choices partially “lock them in”, making them less likely to switch. On the other hand, this “lock-in” also creates a threat of lost future sales should today’s prices be set too high, yielding a downward force. The goal of this paper is to study the effect of state dependence on a multiproduct firm’s forward looking pricing problem and its impact on profitability. In particular, we focus on the implications of parent brand state dependence under umbrella branding. Given that the existence of switching costs is often motivated by brand loyalty (e.g. Klemperer 1995), this is an important question that has not been fully addressed in the extant literature. There are two issues to address in distinguishing the forward looking pricing behavior of single versus multiproduct firms. First, it is important to identify whether current demand for a specific product depends on past experience with that product alone or if it also depends on past experience with other products offered by the same firm, effectively rendering them dynamic complements. This is a measurement issue. Second, when there is state dependence to the parent firm, the two countervailing forces described above become more complex, since a firm that maximizes the joint profits of a portfolio of products must account for the impact of each product’s price on the future demand of its full set of offerings. This is a structural question.