Stretching ̄rm and brand reputation

I consider an adverse selection model of ̄rm reputation. Each ̄rm is characterized by an exogenously given quality level, which is the ̄rm's private information and applies to any product it sells. Consumers observe the performance of the ̄rm's products, which is positively related to the ̄rm's quality level. The ̄rm's reputation is given by the consumers' posterior on the ̄rm's quality level given the ̄rm's performance history. I address the following question: if a ̄rm is to launch a new product, should it use the same name as its base product (reputation stretching), or should it create a new name (and start a new reputation history)? I show that, for a given level of reputation, ̄rms stretch if and only if quality is su±ciently high. As a consequence, stretching signals high quality. If the new product is relatively pro ̄table compared to the base product, then, for a given level of quality, ̄rms stretch if and only if reputation is high (i.e., ̄rms exploit good reputations). Conversely, if the new product is relatively unpro ̄table compared to the base product, then, for a given level of quality, ̄rms stretch if and only if reputation is low (i.e., ̄rms protect good reputations).