In a framework or repeated-purchase experience goods
with seller's moral hazard, umbrella branding may
improve the terms of the "implicit contract" between
firm and consumers, whereby the firm invests in quality
and consumers pay a high price.
Umbrella branding is a superior strategy when there is a
significant overlap between the set of buyers of each of
the firm's products. This result extends the well-known
notion that brand extensions and umbrella branding are
only successful if there is a good "fit" between the
different products under the same umbrella.
Specifically, my result points out that such fit need
not necessarily correspond to objective product
characteristics but rather to the identity of buyers.