Econ: industrial organization

1. Umbrella branding Umbrella branding refers to marketing two totally unrelated goods under the same brand. Examples: Dove makes chocolates and shampoo (and many other things). Casio makes electronic piano and watches. Consider the reputation model discussed in the lecture. A rm can produce an experience goods that is either of high quality or low quality. The marginal cost of producing high-quality goods is 10, while that of low-quality goods is 5. There are 100 consumers each period. Each consumer demands only one unit of the goods, and values highquality goods and lowquality goods at 25 and 15 respectively. Consumers do not know the goods' quality at the time of purchase. Suppose the rm and the consumers engage in a repeated game with common discount factor 5 = 0.8. The stage game is as above. The rm's quality choice affects only the product quality of that period. At the end of each period, the quality choice is revealed to consumers upon consumption. (a) Write down the trigger strategies for the rm and consumers. Explain why it is a subgame perfect Nash equilibrium (SPNE). (b) Now suppose the rm plans to venture into a new market of producing another experience goods. Like the original goods, the new goods can either be of high quality or low quality, depending on the rm's production method. For this new goods, the marginal costs of highquality and lowquality production are 12 and 0 respectively. This new market has 50 consumers each period. Also, each consumer demands only one unit of the goods, and values high-quality goods and low-quality goods at 30 and 16 respectively. Suppose the rm markets the new goods as a separate brand, so that its reputation is distinguished from the old goods. Can the trigger strategies be sustained as a SPNE'? (c) Suppose the rm markets the new and the old goods under the same brand name. Thus, consumers view them as sharing a common reputation. Write down the trigger strategies and check whether it can be sustained as a SPNE