Brands as Beacons: A New Source of Loyalty to Multiproduct Firms

Abstract

This study provides evidence that a multiproduct firm's portfolio of products affects consumer purchase decisions about each of the firm's products. The authors present a theory that explains this empirical regularity. The theory involves revising the information set of consumers to include the profile of multiproduct firms. The authors show that revision of the information set in this way introduces a new source of consumer loyalty and explains interesting empirical regularities in consumer behavior. For example, consumers are loyal to a multiproduct firm even when it does not offer a product that matches their preferences better than a product of competing firms. The authors estimate the model and test its implications using panel data on television viewing choices. The estimated model also allows for state-dependence parameters and unobserved heterogeneity. The empirical results support the model and its implications. The model offers a parsimonious framework for brand-extension strategies and maps new channels of spillovers in a multiproduct firm.