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Signaling Unobservable Product Quality through a Brand Ally

Author(s): Akshay R. Rao, Lu Qu, Robert W. Ruekert

Source: Journal of Marketing Research, Vol. 36, No. 2 (May, 1999), pp. 258-268
Published by: American Marketing Association
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In this article,the authors examine the circumstances in which brand

names convey informationabout unobservablequality.They argue that a
brandname can convey unobservablequalitycrediblywhen false claims
will result in intolerable economic losses. These losses can occur for two
reasons: (1) losses of reputation or sunk investments and (2) losses of
future profits that occur whether or not the brand has a reputation. The
authors test this assertion in the context of the emerging practice of brand
alliances. Results from several studies are supportive of the premise and
suggest that, when evaluating a product that has an important unobserv-
able attribute, consumers' quality perceptions are enhanced when a
brand is allied with a second brand that is perceived to be vulnerable to
consumer sanctions. The authors discuss the theoretical and substantive
implications for the area of brand management.

Signaling UnobservableProduct Quality

Through a Brand Ally

The area of brand management recently has begun to into new categories (e.g., Broniarczyk and Alba 1994;
receive renewed scrutiny in the marketing literature. Loken and John 1993), and managerialactions that can be
Research symposia, special sessions at conferences, and an taken to enhance brand differentiation and profits (e.g.,
entire issue of the Journal of MarketingResearchhave been Boulding, Lee, and Staelin 1994; Zenor 1994). In addition,
devoted to research on the meaning and measurementof the popularbusiness press suggests that brandsincreasingly
"brandequity" (e.g., Parkand Srinivasan 1994; Simon and are becoming a key strategic asset of firms. Apparently,
Sullivan 1993), issues related to extending a brand name brandnames have significantmonetaryvalue (Aaker 1991).
One important theoretical perspective that informs the
monetaryunderpinningof a brandname is signaling theory
*Akshay R. Rao is Associate Professorof Marketing,the CarlsonSchool in informationeconomics (Spence 1973). According to this
of Management, University of Minnesota (e-mail:
Lu Qu is Senior Modeling Analyst, Wells Fargo and Companies (e-mail: perspective, because branded products that falsely claim W. Ruekertis Professorof Marketingand high quality standto lose (1) investmentsin reputation(e.g.,
Associate Dean of Programs, the Carlson School of Management, brand equity) and (2) future profits, a branded product's
University of Minnesota (e-mail: first claim about unobservablequality will likely be true (Erdem
author gratefully acknowledges the financial support of the Marketing
Science Institute in Cambridge, Mass., and the Center for Research in
and Swait 1998). In other words, consumers rationally
Marketing at the Carlson School of Management.The authors are also should infer that a brandedseller's claims about unobserv-
grateful to Mark Bergen, Deborah Roedder John, Kent Monroe, Donald able quality are credible because false claims would lead to
Lehmann, the editor, and two anonymous JMR reviewers for their com- monetarily unattractive outcomes (Tirole 1988). Conse-
ments on previous versions of this article. To interactwith colleagues on
quently, a brand name can be an effective signal of unob-
specific articles in this issue, see "Feedback"on the JMR Web site at
servable quality. We adopt this perspective in our research
and proposethat a brand'ssignaling power can emerge from

Journal of MarketingResearch
Vol. XXXVI (May 1999), 258-268 258
Unobservable Product Quality 259

two sources: (1) dissipative signals, which involve an up- communicatesa level of qualitythatthe first brandis unable
front expenditurein reputationbuilding that will be forfeit to communicateby itself. As we develop in this article, the
should quality turn out to be poor, and (2) nondissipative credibility of the brandally is driven in partby its vulnera-
signals, which do not involve any up-frontexpenditurebut bility to consumer sanctions (i.e., economic sanctions such
place only future profits at risk (roughly correspondingto as boycotts) should the claim of high quality turn out to be
Bhattacharya1980). In the case of the second type of signal, false. These sanctions may result in a brand losing prior
regardless of whether it has invested in reputationbuilding investmentsin reputationor futureprofits (whetheror not it
activities in the past, a brandmay be able to signal unob- has a reputation).Thus, for example, when NutraSweetfirst
servable quality.As we discuss next, we examine this issue was introduced,concerns about its potentialharmfulhealth
in the context of an emerging marketingpractice-the for- effects were only allayed after Coca-Cola, Pepsi, and other
mation of brandalliances (Rao and Ruekert 1994). such credible brands (i.e., brands that could be hurt by
adverse publicity if NutraSweet turned out to be harmful)
CONTEXT "endorsed" the unobservable quality of NutraSweet by
Much of the currentacademicresearch,as well as writing incorporatingit into their diet formulations(Rao and Ruek-
in the popularbusiness press, focuses on individualbrands ert 1994). We proposethata reputationlessbrandwith future
that have an independentand distinct identity. However, as profits at stake also could have allayed fears successfully
Simonin and Ruth (1998) recently discussed, brands often about the harmfulhealth effects of NutraSweet.
exist in conjunctionwith otherbrandswithin the same prod- Our article offers the first systematic empirical examina-
uct. For example, Diet Coke and NutraSweetare physically tion of a brandally's ability to communicate unobservable
and perceptually intertwined,IBM (and other) computers product quality. (Our focus is not on the more traditional
use Intel chips, and a recently launched line of ice cream issue of attributeor affect transferal[i.e., when BrandA has
cordials features Haagen-Dazs in combinationwith various a proprietarytechnology or image that Brand B desires,
branded liqueurs. In addition, two or more brandsmay be and/or vice versa], not because that issue is uninteresting,
featuredin joint promotions,even though they are not phys- but because there is a large literatureon multiattributemod-
els that can be applied directly to understandingthat phe-
ically integrated (e.g., television commercials featuring
Oscar Mayer and Mail Boxes Etc.). Following Rao and nomenon.) We report on two studies that address our pre-
Ruekert (1994) and Simonin and Ruth (1998), we define dictions regarding the circumstances in which an alliance
such brand alliances to include all circumstancesin which with a particulartype of brandcan yield enhanced percep-
two or more brandnames are presentedjointly to the con- tions of productquality.
sumer. These alliances range from multiple brandsthat are
physically integratedin a product (as in the case of Apple
and Motorola)to multiple brandsthat simply are featuredin Although it is not controversialthat brandnames are an
joint promotions (e.g., Bacardi Rum and Coca-Cola). importantmarketingtool, or that brandnames are generally
Furthermore,a new or unknownbrandcould ally with one a good long-term marketinginvestment(Kotler 1994), it is
that is well known (e.g., when NutraSweet initially allied less clear precisely why brand names are beneficial. One
with Coca-Cola), or two or more well-known brandscould school of thought suggests that brandnames enhance con-
form an alliance (e.g., Eddie Bauer and Ford). This phe- sumer perceptions of productquality because brandnames
nomenon, when two or more brand names are featured carrymeanings that consumerscome to value (Gardnerand
simultaneously in a product context, is the focus of our Levy 1955; for a meta-analysis of the empirical link
research. between brandname and perceived productquality,see Rao
Although brandalliances are formed for a variety of rea- and Monroe 1989). Another complementary perspective
sons, ranging from the desire to gain mutual access to pro- suggests that brand names have utility because they are
prietarymarkets(e.g., NorthwestAirlines and KLM) to the sources of informationthat identify the manufacturer,and
attempt to encourage affect transferal (e.g., Lexus and this information should limit any tendency on the part of
Coach), there exists little systematic empirical examination manufacturersof low quality to claim high quality because
of the issue in the academic literature.Consequently,brand such behavior will (when detected) be associated with the
alliances present several complexities about which existing brandin question and will affect futuresales and profitsneg-
theory in marketing is largely mute. Specifically, though atively (Wernerfelt 1988). This second perspective falls
there exist commonsense prescriptions, such as ensuring under the rubric of signaling models in information eco-
that the allies "fit" in some way (Simonin and Ruth 1998), nomics and is examined next.
it is unclear what circumstances favor the formation of a
brandalliance and why, as well as what other specific char- ApplyingSignaling Theoryto Brand Names
acteristics may make one brandan appropriateally relative Often, productquality is not readily observableto buyers
to another. priorto purchasebut is revealed fully afterpurchase(a class
Our article attempts to offer one theoretically based per- of products termed "experience goods"; Nelson 1974;
spective on the issue. Drawing on the signaling notion that Wrightand Lynch 1995). Furthermore,the level of quality is
brand names may communicate unobservable quality, we generally not opaque to the seller, and this differentiallevel
develop and test the argumentthatthe conjoining of two (or of informationbetween buyers and sellers creates the well-
more) brands may have the desirable consequence of known problemof "informationasymmetry"(Akerlof 1970;
enhancing consumers' quality perceptions of the jointly Kreps 1991). A signal is an action that the seller can take to
brandedproductwhen qualityis not readilyobservable.This convey information credibly about unobservable product
occurs when the second brand(i.e., the brandally) credibly quality to the buyer.For example, one signal is the offer of

a good warranty(Boulding and Kirmani 1993; Cooper and building activities, its ability to use the brand name signal
Ross 1985; Grossman 1981). If the sellers' product is of should be affected adversely.
poor quality, it would be foolish to offer a good warranty, However, we arguethat it is still feasible for a reputation-
because presumably, warrantyfulfillment costs would be less brand to signal quality by exposing future sales and
higher for poor quality productsbecause they are likely to profits to risk. In other words, consistent with Wernerfelt's
have higher failure rates.Conversely,sellers of high quality (1988) argument that umbrella brands are useful signals
products can afford to offer good warrantiesbecause the because they expose profits in allied markets to risk, we
likelihood that they will have to honor those warrantiesis argue that a brandcan offer a bond other than prior invest-
relatively low.1 Similarly,advertisingexpenditurecan serve ments in reputation.One such bond is future profits that
as a signal because such expenditureswill be incurredonly would be forfeit if the brandclaiming high quality were to
by honest, high quality firms that can recoup their advertis- offer low quality. Therefore, though the principle (loss of
ing expenditures from future sales. If a low quality firm money) is the same in the case of reputableand reputation-
were to advertise heavily, it likely would not recover the less brands,the mechanism is different.A reputablebrand
advertisingexpenditurebecause consumers would discover already has spent money that will be forfeit if it offers low
its low quality after purchaseand use, and repeatpurchase quality (a dissipative signal), whereasa reputationlessbrand
would not occur. (If purchases in the first period provide can, without spending money, claim to be credible because
sufficient compensation for the advertising expenditure, it will lose money in the futureshould it offer low quality (a
however, such expenditures do not serve as a signal.) In nondissipativesignal) (Bhattacharya1980). This distinction
essence, therefore, a signal is a credible and informative on how brandnames successfully can signal quality is a key
action because those attemptingto signal dishonestly would subtlety that distinguishes our approachfrom that of extant
suffer harmful monetary consequences. According to the approaches(e.g., Erdemand Swait 1998) and, as the results
informationeconomics literatureon brands,underinforma- from our empiricalstudies suggest, is potentiallya manage-
tion asymmetry,brandnames also can serve as a signal of rially useful distinction.
unobservablequality. The argumentthus far has emphasized the logic that, in
Brands names as signals of unobservablequality. If the the event the brand offers low quality, the bond is forfeit
claim associated with a brandis one of high quality and the because consumerswill take some action that will harmthe
brandturnsout to be of poor quality,consumerscan punish brand.However, consumers'ability to hurta branddepends
the brand (Montgomery and Wernerfelt 1992; Wernerfelt on how vulnerable the brand is to consumer sanction. In
1988). Driven principallyby the withholdingof repeatpur- other words, the vulnerability of the brand signal to con-
chase, this punishmentmay range from simply exiting the sumer sanction may vary dependingon the degree to which
marketto engaging in negative word of mouthor calling for consumers can identify and punish a brandthat offers low
regulatoryaction. On occasion, the negative outcome may quality. For example, if a brandcaters to three large auto-
turnout to be disproportionatelysevere; thatis, afterquality mobile manufacturersthat are geographically close, as
debasement is discovered, the offending brand may fare opposed to catering to three aerospace buyers that are
worse than low quality brandsbecause this brandmay have located in three differentcontinents,the likelihood that low
no customer franchise among consumers of low quality quality in the first case will lead to speedy negative public-
(Rao and Ruekert 1994; Wernerfelt 1988). Because such ity and consumer sanction by all three customers is rela-
punishmentwill be monetarilydetrimentalto the seller, the tively higher.By the same logic, a brandthat is diversified
provision of a brandname can serve as a quality assurance (e.g., 3M, which caters to multiple markets throughmore
device. Branded productsare likely to be of higher quality than 60,000 stockkeeping units) offers a less vulnerable
than unbrandedproducts, and brand names therefore can bond than one that is not (e.g., McDonalds, which caters to
function as effective signals of unobservablequality. Con- essentially one market,with a small assortmentof homoge-
sumers who believe this logic will accept the brandedprod- neous products),because it is more costly for consumers to
uct's quality claim as true. seek out and destroy every tentacle of a diversified firm.
According to much of the extant literature,the ability of Even a reputationless brand that stakes future profits (a
a brandname to signal unobservablequality is based on the nondissipativesignal) is credible only if these futureprofits
potential loss of prior brandequity-related investments in can be influencednegatively by consumersrelativelyeasily.
reputation(Erdem and Swait 1998). In other words, con- If it is costly to harmthe futureprofitsof such a brand,then
sumers can punish firms by withholding future purchases; the credibility of the nondissipative signal is lower. (This
consequently, sunk investments in brand equity-building argumentis fundamentallysimilarto the argumentin invest-
activities are irrevocably lost. This investment can be ment portfolio theory,according to which the riskiness of a
thought of as a "bond"that the brandoffers; the higher the portfolio of investmentsis relatedinversely to the degree to
bond (i.e., the greaterthe dollar amountspent on building a which it is diversified;Fama and Miller 1972.) In summary,
reputation),the more credible the signal is (Ippolito 1990). the degree to which a brand'ssignal is bonded is a function
Implicitly, therefore, if a brand has not invested in brand- of not only the amountof money at stake (either in termsof
sunk costs or future profits), but also the degree to which
these monies are vulnerableto futureconsumer sanction in
[This strategy will work only if the provision of a good warrantyby a terms of the cost to the consumer in effecting monetary
poor quality seller raises his or her costs (and price) to a level higher than damage.
thatof the high quality seller. If the poor qualityseller can offer a good war-
The brand ally as a signal of unobservableproductqual-
ranty and successfully absorb the higher costs of warranty fulfillment
throughcharging a higher price (which is still lower than that of the high ity. We now turnto the second element of our researchques-
quality seller), warrantieswill not be a successful signal of quality. tion. As we arguedpreviously,brandnames are credible sig-
Unobservable Product Quality 261

nals of quality when they post vulnerable bonds based on HIa:When the observability of product quality is low, overall
either (1) past expenditures on brandequity or reputation- perceptionsof quality will be higher when the nondissipa-
building activities or (2) future sales and profits at risk. tive signal providedby the brandally is vulnerableto con-
However, when a brandcannot successfully signal its high sumer sanction, relative to when this signal is not vulnera-
quality by itself (perhaps because, similar to NutraSweet ble to consumersanction.
when it first enteredthe market,it is a new brandand there- This predictionis based on the rationalethat the vulnerabil-
fore has no reputation),it would be appropriatefor it to con- ity of the ally to future sanctions makes the quality claim
sider alternativemeans of signaling its high quality to the credible when quality is unobservable.When the brandally
marketplace.Credible and enforceable warrantiesare one is not vulnerable to future sanctions, its implicit endorse-
such mechanism (Grossman 1981). Alternatively, an ment is relatively less credible because, if the quality claim
unknownbrandmight signal high quality by selling through
turns out to be false, consumers will find it costly to harm
a reputableretailer(Chu and Chu 1994). Another signaling
the ally. Consequently,under low observability of quality,
mechanism, which forms the focus of this research, is to
enter into an alliance with a second brandthat can assist in quality perceptionsshould be higher when the brandally is
easy to punish.
credibly signaling high quality to the marketplace.2The
premise here is that the second brand in the alliance suc- Hlb: When the observabilityof productquality is high, overall
cessfully signals the quality thatthe originalbrandcould not perceptionsof quality will not be significantlydifferent,re-
signal by itself. The source of the second brand'ssignaling gardless of the vulnerabilityof the nondissipative signal
ability could be its vulnerabilityto loss of either (1) invest- providedby the brandally.
ments in reputation(a dissipative signal) or (2) futureprof-
its independentof its investments in reputation(a nondissi- In this case, the observabilityof quality makes the ally's sig-
nal irrelevant because the claim can be verified through
pative signal).
Notice that we simply have taken our theoretical argu- inspection.Consequently,if the claim is observedto be true,
ment regardingthe utility of a brandname as a signal and quality perceptionswill be high, regardless of the vulnera-
applied it to the brandalliance context. As we discuss in a bility of the ally.
subsequentsection, managers'beliefs about the prospectof Using the same rationale,it is possible to predicteffects
consumer sanctions likely drive theirattemptsto ensure that on the basis of the dissipative signal provided by the brand
their brandnames are not associated with low quality prod- ally:
ucts. Consequently, consumer beliefs that brand allies are
H2:Overall perceptions of quality for a product featuring a
credible endorsersof unobservablequality indeed might be brandalliance will vary, depending on the observabilityof
rational. the product's quality and the credibility of the dissipative
To summarize,a brand's(or brandally's) ability to signal signal providedby the brandally.
quality depends on the size and vulnerabilityof its (1) sunk
investments in brand reputation at risk and/or (2) future Specifically, focused tests should reveal that
profits (independentof its investmentsin reputation)at risk. H2a:When the observability of product quality is low, overall
The bond in the formercase can be viewed as the amountof
perceptionsof quality will be higher when the dissipative
brand-relatedadvertisingperformedin the past, other prod- signal providedby the brandally is vulnerableto consumer
uct design and development activity, and the like (elements sanction, relative to when this signal is not vulnerableto
of brandequity) that will be forfeit if consumersboycott the consumersanction.
brandshould it be caught offering low quality, whereas the
bond in the lattercase can be viewed as the amountof prof- Again, this predictionis driven by the rationalethat, under
its that will be forfeit if consumerscostlessly can identify all low observability,when the brandally is vulnerableto con-
the products associated with a brand that has offered low sumer sanction because it has a valuable asset that will be
quality and withhold future purchases. lost should it falsely claim high quality, its claims about
unobservablequality are credible.
H2b:When the observabilityof productquality is high, overall
The principalpredictionsthatemerge from our theoryare perceptionsof quality will not be significantly different,re-
capturedin two interactionhypotheses that predictdifferent gardless of the vulnerabilityof the dissipative signal pro-
quality perceptions depending on quality unobservability vided by the brandally.
and the credibility of the signal (dissipative and nondissipa-
tive) provided by the brandally. Here again, because the claim can be verified by inspection,
the signal providedby the ally is irrelevant.
Hi: Overall perceptions of quality for a product featuring a In the interestof brevity, we do not formally propose an
brand alliance will vary, depending on the observabilityof exhaustive set of hypotheses for all possible main and inter-
the product'squality and the credibilityof the nondissipative action effects. However, we report and discuss significant
signal provided by the brand ally. results of interestsubsequently.
Specifically, focused tests should reveal that To test our predictions,an experiment was conducted in
which three factors were manipulated:the observabilityof
quality, the nature(or type) of the signal communicatedby
2Although not germane to this research, an obvious question centers
the brandally, and its credibility.In a second study,we repli-
around which of the several available signaling mechanisms (warranties, cate a portion of the first study with some methodological
channel alliances, brandalliances, and so on) should be chosen. changes and find identical results.

METHODOLOGY quality perceptions (Cronbach'sa = .85) also was gener-

Overviewof Methodology ated. Finally, using subjects' guesses about the true identity
of "Advantage"and "Calypso" as a basis, the most fre-
To test the assertions suggested by the theoreticaldevel- quentlyoccurringname was selected as the name for the real
opment, several different approaches were considered. brandally. This brandis a well-known internationalcorpo-
Because of the paucity of reliable secondary data and the rationwith a wide arrayof electronicconsumerproductsand
potential advantagesof experimentationin theory testing, it interests in other aspects of the entertainmentbusiness and
was decided that an appropriatemethodological approach was among the top five global brands in a recent popular
would be a traditional,between-subjects,multifactorexper- industrysurvey of brandaffect and recognition.Thus, it was
iment. In this design, the impactof the credibilityof the two reasonedthat this brandwas likely to yield a high reputation
types of signals, as well as the observabilityof the product's perception,yet a claim about futureprofits being secure (in
performance,could be manipulateddirectly.The key depen- the low credibilitycondition)also would be believable.3The
dent variablewould be the perceptionof productquality for pretests also were useful in developing product stimuli
the jointly brandedproduct. based on the informationneeds of the subjects.
Pretestingfocused on the developmentof appropriatestim- Independentvariables. The first factor (credibilityof sig-
uli, manipulations,and dependentvariables,as well as the nal) involved the manipulationof the degree to which the
identificationof potentialproblemswith the instrument,pro- brandally stood to sufferif the productfailed to live up to the
cedures, transparencyof hypotheses (yielding demand arti- promised level of quality. The two levels of manipulation
facts), and the like. Subsequently,in the formaldatacollection included(1) a high condition,in which the ally providingthe
exercises, mall-interceptsubjectswere assigned randomlyto endorsementpotentiallystood to suffer considerablemone-
one of several experimentalconditions and requested to tary damage should customers' quality expectations be
respondto typical paper-and-pencil measures.Multipleindi- betrayed,and (2) a low condition,in which the ally providing
cators of dependentvariableswere submittedto traditional the endorsementpotentially stood to suffer little monetary
reliability checks and factor analysis. Tests of hypotheses damage should customers'quality expectationsbe betrayed.
involved standardanalysisof varianceprocedures. Consistent with the procedureemployed by Boulding and
Kirmani(1993), these claims were providedin the stimulus,
Study I attributedto a ConsumerReportsstoryon the product,and (as
The first study employed a 2 (low and high credibilityof we discuss subsequently)perceivedas credible.
the signal providedby the brandally) x 2 (type of the signal The relevantdescriptionfor the high credibilitycondition
[dissipative and nondissipative]providedby the brandally) was as follows:
x 2 (high and low observabilityof productquality)between- While there is not enough informationavailable to ac-
subjects factorial design. As we discuss subsequently, curatelyevaluate the qualityof the Calypso TV, the fact
though the manipulationof the credibilityof the signal (rel- that it is a collaborationwith Advantage should make
ative vulnerabilityof future profits to consumer sanctions) consumers very comfortable with the claims of high
and observabilityof quality were embedded in the stimulus quality. Advantage is a brand name that is associated
description, the manipulation of the type of signal was with many products,and if the Calypso productfails,
consumers will definitely blame Advantagefor the fail-
accomplished by using real and fictitious brandnames (i.e.,
ure. As a result, Advantage sales in their other product
a reputablebrandpotentiallyplacing a dissipative signal at
categories will suffer greatly.
risk, and a reputationlessbrandpotentially placing only a
nondissipativesignal at risk). The relevantdescriptionfor the low credibilitycondition
Pretests. On the basis of three pretests (n = 43, 168, and was as follows:
105), the following decisions were made: Television sets
There is not enough informationavailableto accurately
were selected as the stimulus product for the first study
evaluatethe qualityof the CalypsoTV.The fact thatit is
because product quality was perceived to be an important a collaborationwith Advantage should not necessarily
consideration in the purchase decision (6.28 on a seven- make consumers comfortable with the claims of high
point scale), a key requirementof the theory (Tellis and quality.Advantageis a brandnamethatis associatedwith
Wernerfelt1987). "Calypso"(Imagery= 3.84, Concreteness many products,and if the Calypso productfails, Advan-
= 3.69, Meaningfulness= 1.58, ratedon seven-point scales tage is safe from blame because the other productsare
where I = "Low" and 7 = "High" ) and "Advantage" sold in completelydifferentmarkets.As a result,Advan-
(Imagery = 3.88, Concreteness = 2.33, Meaningfulness = tage sales in theirotherproductcategorieswill not suffer.
2.63, ratedon seven-point scales where I = "Low"and 7 = Notice that in both conditions, the marketcharacteristics
"High"), which are both fictitious names, were selected as of the brandally are unchanged;in the low condition, the
the primary brand name and name of the fictitious brand brandally's presence in multiple marketsis arguedto make
ally, respectively. The scores on the imagery,concreteness, it relatively immune to punishment, whereas in the high
and meaningfulness scales (Paivio, Yuille, and Madigan condition, the brandally's presence in multiple markets is
1968) reveal that these names do not have high imagery,are arguedto make it relatively vulnerableto punishment.This
not concrete (i.e., well-entrenched),and are not laden with was done to ensure that both stories differed minimally to
secondary meanings and, thus, are relatively neutralterms. avoid potentialconfounding.In addition,similarto the argu-
These propertiesare desirable for the experiment, because
they reduce the possibility thatthe imagery,concreteness,or 3Consistentwith priorresearchin the area (Loken and John 1993) and to
meaningfulness of the fictitious brand name drove the protectthis journal from potentiallitigation,the true identityof the brandis
observed results. A five-item dependent variable scale for not revealed here.
Unobservable Product Quality 263

Table 1 suring the perceived quality of unobservableattributes is

INFORMATION infeasible. However, because perceptions about attribute
quality (regardless of their observability)should influence
Study I Study2 perceptionsof overall quality (Zeithaml 1988), the principal
(n) (n) dependent variable was constructed using a multidimen-
Gender sional scale of overall quality that was based on priorlitera-
Males 53 31 ture and pretests. This approach is consistent with prior
Females 67 29 empirical research in this area (Boulding and Kirmani
Age 1993). Scale items included measures of global quality, as
20-29 59 19 well as specific attribute-relevantevaluations that were
30-39 35 22 appropriatefor the product under examination (see the
40-49 24* 19
Appendix for scale items). Finally, manipulationchecks and
Annual Income ($) demographicinformationalso were gathered.
<20,000 34 16
Sample. One hundred twenty mall shoppers in a major
20,001-30,000 14
30,001-40,000 20 12
Midwestern city participated in the study. The sampling
40,001-50,000 11 6 frame was restrictedto adults age 18 to 49 years. Subjects
50,001-60,000 8 3 received a small ($2.00) token of appreciation for their
>60,000 9* 9 efforts. Data collection was executed by a professionalmar-
Education keting researchfirm. Subjectstook no more than 30 minutes
Some high school - 2 to complete the questionnaire.
Graduatedhigh school 25 19 Instrumentand procedures. Subjects were informed that
Some college 35 24
Graduatedcollege 36 10 they were being asked to participatein a market research
Post college 22* 5 survey that would help manufacturersbetter design and
Total 120 60
develop new products.Then, in the first section of the ques-
tionnaire, in addition to responding to several distracter
*Does not total to 120 because of missing observations. items, subjects provided informationabout their awareness
of the variousbrandnames used in the study,as well as their
ments provided in advertisementsby a firm or a competitor, perceptionof the quality of those brandnames.
the reasoningfor the credibilityof the claim is embedded in In the second section of the instrument,subjectswere pro-
the description (for a similar stimulus that provides strong vided informationabouta new televisionset on the market.As
quality-related arguments, see Simonin and Ruth 1998). mentionedpreviously,a key featureof the television set was
Such an approachis consideredappropriategiven our inter- the ability to reduce the volume duringcommercialbreaks.
action hypotheses, accordingto which this strongmanipula- Following this, subjectsrespondedto dependentmeasures.
tion should not yield an effect when observability is high, Analysis and results.An examinationof responses to the
but should yield an effect when observabilityis low. question about the true purpose of the study indicated that
The second factor (observability of quality) refers to no subjectsguessed the hypotheses.Descriptiveinformation
whether the product's performancecould be assessed prior about the sample is available in the first column of Table 1.
to purchase.Subjects were told that the television set had a Subjects representedboth genders and tended to be rela-
unique attribute;it automaticallywould lower the volume tively young, well-educated, and reasonablyaffluent. Sub-
during commercials. In the high observabilitycondition, in jects owned an averageof 1.96 television sets (rangingfrom
addition to being able to observe performancein the store, a low of 0 to a high of 5). Manipulationcheck results sug-
subjects were told that they had observed the television set gest that all three manipulationswere successful (mean dif-
perform well in a free, 30-day, in-home trial. In the low ferences of .47 [p < .05], 1.2 [p < .0001], and 2.6 [p < .0001]
observability condition, subjects were told that they could on a seven-point scale for observability,whetherbrandally
examine the product's performanceonly in the store; the was perceived to be vulnerableto punishment,and whether
stimulus did not include an in-home trial opportunity.Thus, the brand name was perceived to be real, respectively).
the automatic volume reduction mechanism was differen- Finally, quality was perceived as importantin the purchase
tially observable to the two sets of subjects.4 of television sets (5.87 on a seven-point scale).
Finally, the manipulationof the third factor (type of sig- One hundredeighteen usable responses were analyzed in
nal) involved the use of a fictitious and real brandname as an overall ANOVA for the full model on perceived quality.
the brandally, as noted previously.The implicit rationaleis All cells had a sample size of 15, except the high observ-
that the real brandname carriesa high investmentin reputa- ability/high vulnerabilitycells for both real and fictitious
tion (which potentially could serve as a dissipative signal), brandally conditions (n = 14). The overall model is signifi-
whereas the fictitious brand name has no reputation(and cant (F7,110= 2.55, p < .05) and our key interactionhypoth-
thereforecan serve only as a nondissipativesignal). esis (credibility of signal x observability) is supported
Dependent variables. The theory addresses the effect of (Fl,I 10= 3.30, p < .10, 12 = .029), albeit at a weakerlevel of
credible informationon perceptionsof quality for attributes significance than desired.5 Some other notable significant
thatare not observable.Therefore,it is importantto measure
attributesthat are unobservable.This requirementpresentsa
5Because of the high cost of data collection, our sample is relatively
problem,because in the quality observableconditions, mea- small, and therefore,the significance level attachedto the omnibus F-tests
are relatively weak. However, as we discuss subsequently,our sample is
41nthe second study, these manipulationswere changed and made con- sufficiently powerfulto allow for assessing supportfor focused tests of the
siderably more subtle. specific hypothesesat the traditionalp < .05 level.

results were the following: (1) observabilityx type of signal not provide a credible signal (both results significant at p <
interactioneffect (Fl,110= 3.00, p < .10, Tr= .027), (2) the .01, one-tailed tests; d = .96 and .70 for the comparisons
main effect of credibility of signal (Fl,l0 = 5.21, p < .05, involving the reputable brand ally and the reputationless
,12 = .045), and (3) the main effect of the type of the signal brandally, respectively). In other words, underlow observ-
(Fl, 10= 5.58, p < .05, r2 = .048). The lattertwo resultsindi- ability, for both the reputablebrandally and the reputation-
cate that when the brand ally has something to lose, the less brandally, relativelyhigherqualityratingsare observed
product receives significantly higher ratings than when it when the brandally is perceived to be vulnerableto punish-
does not, and the reputablebrandally generatessignificantly ment and not otherwise.6Collectively, these results provide
higher ratings than the reputationlessbrand.(Details about supportfor Hla_b,as well as H2a-b.
the reliabilityand factor structureof the dependentvariable Rival explanations.To make the signal credibilitymanip-
are available in the Appendix.) ulation credible and consistent with prior research(Bould-
To assess support for the principal predictions, the cell ing and Kirmani1993), the source of informationregarding
means for the appropriateconditionswere comparedusing a the potential negative consequences (or lack thereof) of
planned contrastprocedure(Figure 1). Under high observ- productfailurewas ConsumerReports.Although this source
ability, quality perceptionswere not significantly different, of informationwas not varied across conditions and was
regardlessof the credibilityof either kind of signal provided perceived as credible by subjects, there is a potential con-
by the brandally. Underlow observability,however,quality cern that, in conditions of low observability,the reputation
perceptions when the ally provides a credible signal of of ConsumerReportsfor objective and unbiasedevaluations
either type are significantly higher than when the ally does drove subjects' responses, not the differences in credibility
of the signal. In other words, it is unclearwhetherthe effect
would be obtainedif ConsumerReports had not been iden-
Figure 1 tified as the source of the information.In light of this con-
QUALITY BRANDED cern, a second study was conducted.In this study,Consumer
PRODUCTUNDERDIFFERENT LEVELSOF SIGNAL Reports was not identified as the source of information
about the brandally's vulnerability(or lack thereof) and its
implication for making qualityjudgments. In addition,sev-
eral othermodificationswere made:(1) a more refinedmul-
Perceived Quality tiple-item scale was used for the observabilitymanipulation
7.0 r
check and (2) a new observability manipulationwas pro-
vided in which, in both high and low conditions, subjects
6.0 -
could take the television set home. This second refinement
5.9 -
protects us from any concerns that subjects in the "free, in-
5.8 - ..-*(5.85, .58)" home trial" believed that the 30-day trial itself provided a
5.7 - signal of quality.The results of the second study are identi-
cal to those of the first. The second study and associated
5.6 -
results are describednext.
Study 2
/594 9(5.40,94) Because the results observed in the first study showed
(5.24,.74 identical effects for real as well as fictitious brands,and in
5.2 .---------- ""-
(5.21, .96) an attemptto minimize the costs of data collection, the sec-
5.1 ond study focused on a replicationof the real brandname
(5.12, .94)b 5.,.s
65 condition in Study 1. Therefore, in this study, a 2 x 2
between-subjects factorial design studied the impact of
varying the credibilityof the signal provided(high and low)
4.8 by a well-known brand ally in conditions of high and low
4.7 observability. In other words, the well-known (and rep-
utable)brandally has a dissipativesignal that is eitherat risk
(i.e., the signal is credible) or not at risk (i.e., the signal is
4.5 (4.55, .79)d not credible). The productcontext and dependent variables
were identical, though several additionalitems from a per-
0 i
ceived risk scale (Jacobyand Kaplan 1972) were addedas a
Low High
Creditibility of Signal more refined manipulation check of observability. This
modificationwas consideredappropriatebecause the theory
High observability/high
---- - High obscrvability/ suggests that reductions in observability increase percep-
low dissipativesignal
tions of risk of nonperformance.
............. Low observability/high minaLow observability/low Independentvariables. Several modifications were made
dissipativesignal dissipativesignal to the stimulus. First, as noted previously, the credibility of
(reputablebrand) (reputationlessbrand)

6We also collected and analyzed data on willingness to (1) pay and
Notes: Figures in parenthesesare means and standarddeviations,respec- (2) buy, as well as on (3) the targetof punitiveaction should the productnot
tively. a is significantly higherthan b (p < .05). c is significantlyhigherthan perform. Because these issues are tangentialto this article, the results are
d (p < .05). not reportedhere but are available in Rao, Qu, and Ruekert(1997).
Unobservable Product Quality 265

signal manipulationwas made more subtle by eliminating the store.Everytime a commercialcameon, the vol-
ConsumerReportsas the source of information.Second, the umewas reduced.
observability manipulation was changed so that, in both Proceduresand results. Similar to the first study, a mall-
conditions, subjects were told that they could take the tele- interceptprocedurewas used, and 60 usable responses were
vision set home and observe it functioning.However, under collected (n = 15 per cell) by a professionalmarketresearch
low observability,two factors that potentially could affect firm. Demographicinformationabout the subjects is avail-
performance(vagaries of weatherand location of the set in able in the second column of Table 1. The dependent vari-
the room) were described to have stayed constant, whereas able was identical to that used in the first study and dis-
under high observability, these two factors varied suffi- played desirable psychometric properties(Cronbach'sa =
ciently to allow for a rigorous test of the electronics of the .92, factor loadings rangingfrom .91 to .94, with one factor
television. It was reasoned that subjects who had observed [k = 4.32] emerging). In addition, the manipulationcheck
the television set work well in a variety of settings would for the credibilityof the signal (Cronbach'sa = .85) was sig-
belong in the high observabilitycondition, whereassubjects nificant (mean difference of .66, p <.05) though, as we
who had observed it working in only one setting would expected, lower than in the first study; the observability
belong in the low observabilitycondition. manipulationcheck (Cronbach'sa = .92, mean difference of
The low observabilitycondition stimulus was as follows: .57, p <.05) was also significant.
The results from this study closely mirror those of the
Theautomaticvolumecontrolof commercials is a very
first study (Figure 2). As predicted, a Duncan's Multiple
important thingsthatcanmakethisfeaturefail.First,if Range Test reveals (a = .05) thatqualityperceptionsare sig-
there is interferencefrom other equipmentlike mi- nificantly higher when the brandally is vulnerableto pun-
crowaveovensor highvoltagepowerlines,thisvolume ishment, relative to when it is not so vulnerable,in the low
controlof commercialsmaybecomepermanently dam- observabilitycondition; however, in the high observability
aged.Second,duringthunderstorms, becauseof electri-
cal dischargein the atmosphere,
commercialsmaybecomepermanently damaged. Figure 2
Youpickup a remotecontrolandturntheCalypsoTV
set on to a programin progress,andin a few minutesa
commercialbreakoccurs.Youcansee thevolumelevel ANDTYPE:STUDY2
on the screen,and you noticethatthe volumedrops.
Youtrythison anotherbrandof TV set andnoticethat
Perceived Quality
the volumeis muchhigherduringa commercial.You
7.0 r
canhearit, andyou canalso see it on the volumemon-
itoron the screen. 6.0

You look at the productbrochureand decideto take
themupon theirfreetrialoffer.So, you havetheset de- 5.8
liveredandinstalledin yourhomefreeof charge.You 5.7
use the set for 7 daysafterwhichthedealershipcomes I

andtakestheTV away.Duringthese7 days,you forget 5.6 -'"(5.64,131)"

to placethe TV in manydifferentplacesof yourhome 5.5
to see if therewereany problemsbecauseof electrical Is
interference. Youalso experiencedfine weather-there I

were no thunderstorms. Throughout,the TV set per- 53 Is ts

formedfine, andthe automaticvolumecontrolof com- 5.2

mercialsfeatureperformedas it hadperformedin the
store.Everytime a commercialcame on, the volume 5.1

was reduced. 5.0

For the high observabilitycondition, in the last paragraph, 4.9

the degree to which the set was exposed to vagaries of 4.8

weather was enhanced, as follows: 4.7
(4.71, 1.14) / 4.77.89)

You look at the productbrochureand decideto take 4.6 '(4.61,1.45)b

themupon theirfreetrialoffer.So, youhavetheset de- 4.5
liveredandinstalledin yourhomefreeof charge.You
use the set for 7 daysafterwhichthedealershipcomes 0 I
andtakestheTV away.Duringthese7 days,you place Low High
theTV in manydifferentplacesof yourhometo see if Credibility of Signal
therewereany problemsbecauseof electricalinterfer-
ence.Youalso experiencedmanythunderstorms during High obscrvability
the week,someof whichoccurredwhentheTV was in ------ Low observability
one place,and some of whichoccurredwhenthe TV
was in other places in your home. Throughout,the TV
set performed
fine,andtheautomaticvolumecontrolof Notes:Figuresin parentheses
commercialsfeatureperformedas it hadperformedin tively. a is significantly higherthan b (p < .05).

condition, there is no significant difference in quality per- words, the firm's vulnerabilityto economic losses is the cen-
ceptions. In other words, when the brand ally provides a tral issue. This is an importantsubtletythatenriches the the-
credible signal and quality informationis unobservable,the oretical argument,because vulnerabilityexists at a higher
brand ally's vulnerabilityto punishment is used by con- level of abstraction than reputation and advertising. For
sumers to infer the quality of the product, which suggests example, though signals such as reputationand advertising
that the ally's vulnerabilityto loss of futuresales (and thus, involve a monetary expenditure (i.e., "public burning of
loss of sunk costs in reputation)serves as a credible signal money"), signals such as warrantydo not involve any mon-
of unobservablequality.7 etary expenditurebut stake or pledge a futurecost to com-
municate unobservablequality credibly. Similarly, a brand
GENERALDISCUSSION name with no reputation(i.e., a brandthat has not engaged
Empirical tests of economic theories using primarydata in any public burning of money) can communicate unob-
are relatively rare (for exceptions, see Boulding and servable quality credibly if it is able to demonstratea vul-
Kirmani 1993; Rao and Bergen 1992; Urbany 1986). In nerabilityto futureeconomic sanctions.
addition, as Venkateshand Mahajan(1996) note, analytical In addition, we show how a brand ally's vulnerability
or empirical research on products that include multiple would make it an attractivepartner.When a brandis unable
brandnames does not exist. This articleemploys an empiri- to communicate quality credibly by itself (i.e., it can not
cal test that uses primarydata to assess the utility of an eco- "make"vulnerabilityin-house), it may do so by allying with
nomic theory in addressing the issue of multiply branded a credible ally (i.e., it may "buy"anotherbrand'svulnera-
products.In particular,we offer the first empiricaltest of the bility). This is an insight that is new to the brandmanage-
circumstances when a brand's (1) vulnerabilityto loss of ment literaturein marketing.It also suggests that vulnerable
future profits alone and independentof reputation(i.e., the brandsmay tradeon theirnames in a marketfor brandallies.
provision of a nondissipativesignal) and (2) reputation(i.e., For example, in 1988, Sunkist received royalties worth
the provision of a dissipative signal) are likely to yield $10.3 million by licensing its name for use on productsas
enhanced perceptions of product quality for the jointly diverse as soda, candy, and vitamins (Aaker 1991).
brandedproduct. Finally, though the degree of fit between the two brands
The results from the studies suggest that, consistent with may be an importantissue, our theoreticalperspectivesug-
our premise, the credibilityof the "hostage"providedby the gests that alliances between brandsthat do not necessarily
second brandin a brandalliance is a useful piece of infor- fit well together(but the brandally is vulnerableto punish-
mation regardingproductquality when quality is unobserv- ment) also may be successful. Thus, advertising tie-ins
able. The hostage makes the brand vulnerable because it between US West and 3M, or American Express and Tim-
stands to suffer economic losses in the future should the berland,may be appropriateas one brandtries to leverage
claim turnout to be false, or because it standsto lose invest- the vulnerabilityor reputationof anotherbrandto endorse
ments made in the past (i.e., investments in reputation) its unobservablequality.
(Shapiro 1983) because that investment will be forfeit Managerial.Managersshoulduse extremecare in forming
should the claim turn out to be false. This finding lends brandalliances.Particularlyin competitivemarketsin which
addedcredence to the finding reportedby Boulding and Kir- small percentagesof marketshare translateinto huge dollar
mani (1993), albeit in a differentcontext. They were able to volumes and margins,managers'perceptionsthattheirbrand
show the effects of bond credibilitythrougha manipulation franchisewill be damagedif it is associatedwith a poorqual-
of reputation(Consumer Reports ratings of past models), ity productlikely motivatesthemto be circumspect,withgood
whereas we are able to show the effect with and without the reason(Rao and Ruekert1994). This circumspectionlikely is
manipulationof reputation.As we discuss subsequently,this driven by the recognitionthat a brandthat is associatedwith
is potentially importantfrom a managerialstandpoint. anotherbrandof poorqualitystandsto suffersignificantmon-
etarylosses shouldconsumersattributeany blame to the first
Contributions brand.In otherwords,managersare and should be cognizant
Theoretical.The currentliteraturein marketingand eco- of the vulnerabilityof theirbrandto futureeconomicsanctions
nomics has emphasized the utility of constructs such as from irateconsumers,should their brandbe associatedwith
advertising and reputationin conveying the unobservable anotherbrandthatdeliverslower qualitythanclaimed.
quality of a brandedproduct.In our treatmentof this issue, In addition,a brandthat has a large amount of profits at
we implicitly arguethatthe degree to which a firm will suf- risk potentially can use that vulnerabilityto argue that its
fer monetarily is the crucial construct of interest. In other claims aboutunobservablequalitymust be true;if they were
false, it would have too much to lose. More specifically, a
71n a third study, the details of which can be obtained from the first reputationlessbrandcould make itself vulnerableto loss of
author,a subtler manipulationof the credibility (vulnerability)signal was futureprofitsby puttinga large futurerevenue streamat risk
employed in a three-factordesign that replicated Study 1. This subtler and thus signal its unobservablequality.Then, the economic
manipulationwas not effective, and consequently,the study did not yield rationalefor high unobservablequality could be offered in
the hypothesizedresults.An internalpost hoc analysis of those subjects for
whom the manipulationworkedas desired(approximately90% of the data) advertisingcopy or during sales presentations.
provides supportfor the effect of the signal credibility,albeit only for the
reputablebrand.This finding providesan importantboundarycondition for Limitationsand FurtherResearch
the theory;seemingly, subjectsdo not infer sophisticatedeconomic theories
about the vulnerabilityof a brandto sanctions and the relationshipof that
Methodology. Experimental approaches to examining
vulnerabilityto credible claims about unobservablequality spontaneously, marketplacephenomenaoften are criticizedfor lacking real-
but (as suggested by the first two studies), if they are alertedto the reason- ism (i.e., an external validity concern) and for often gener-
ing, they may act in a mannerconsistent with the theory. ating results as a consequence of artificially strong manipu-
Unobservable Product Quality 267

lations (i.e., a demandartifactconcern).8In this research,we Appendix

have been sensitive to these concerns in two ways. First, the SCALEITEMSFOR PERCEIVEDQUALITY
use of a between-subjectsdesign limits concerns regarding
demand artifacts; a within-subjects design would have Item-Total Factor
raised concerns that the differences in the manipulations Item Correlation Loadings*
would be obvious to subjectsand potentiallycould influence A. Global Measures of Quality
their response. Second, after establishing theoretically dri- 1. Perceptionof the overall quality .74 .83
ven results in the first study, we performeda second study 2. Perceptionof the durability .83 .90
3. Perceptionof the workmanship .83 .90
with weakermanipulationsto determineif the effects would
disappear.Yet, in this second study,we find an identicalpat- B. Product-SpecificMeasureof Quality
4. Perceptionof the sound quality .70 .81
tern of effects. 5. Perceptionof the pictureclarity .72 .82
It should be noted that we consistently find interaction
effects such that the effect of the brandsignal is observed *Only one factoremerged with an eigenvalue greaterthan I (k = 3.64).
Note: Cronbach'sa = .91. Although the items were identical in all stud-
only under low observability and not under high observ- ies, these data pertainonly to Study 1.
ability, regardless of the strength of the manipulation. In
other words, despite what appear to be overwhelming
manipulations at first blush, when product quality is not a
mystery, subjects are not persuaded by those strong as qualitative,data will providea rich descriptionof various
manipulations. In effect, the presence of quality observ- phenomenain the area of brandmanagement.
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