Brands Show Identity

Marketers have long noticed puzzlingly high levels of brand loyalty:

Consumers appear to have high willingness to pay for particular brands, even when the alternatives are objectively similar. The majority of consumers typically buy a single brand of beer, cola, or margarine, even though relative prices vary significantly over time, and consumers often cannot distinguish their preferred brand in blind “taste tests”. Consumers pay large premia to buy homogeneous goods like books and CDs from branded online retailers, even when they are using a “shopbot” that eliminates search costs. A large fraction of consumers buy branded medications, even though chemically equivalent generic substitutes are available at the same stores for much lower prices.

Brand loyalty is big barrier to innovation, and an important reason why inefficient firms manage to survive so long.

Brand preferences create large entry barriers and durable advantages for incumbent firms, and can explain persistence of early-mover advantage over long periods

In the latest American Economic Review Bronnenberg, Dube, & Gentzkow offer new clues:

Variation in where consumers have lived in the past allows us to isolate the causal effect of past experiences on current purchases, holding constant contemporaneous supply-side factors such as availability, prices, and advertising. … 60 percent of the gap in purchases between the origin and destination state closes immediately when a consumer moves. … The remaining 40 percent gap between recent migrants and lifetime residents closes steadily, but slowly. It takes more than 20 years for half of the gap to close, and even 50 years after moving the gap remains statistically significant. … The relative importance of brand capital is higher in [product] categories with high levels of advertising and high levels of social visibility. (more)

This ad effect is puzzling because:

Large literatures have measured the effects of advertising, but these studies often find no effects [of ads on sales], and the effects they do measure are estimated to dissipate over a horizon ranging from a few weeks to at most five or six months.

Let me suggest that an important use of brands is to create and signal identities. We create a coherent understandable idea of the kind of person we are, integrated with the kind of products we use, and we prefer not to change that concept, so that others can continue to rely on their expectations about us. We are willing to pay higher prices, and neglect info about quality, in order to keep a persistent style and appearance. So brands are naturally more important for products we use that others see more, and where ads have made connections to identity more salient.

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  • http://bur.sk/en Viliam Búr

    Assuming that attention is a scarce resource AND some products are really bad, (part of) the brand loyalty is a rational decision.

    I need a product of a type X. I buy a product X1 and I am satisfied with it. I update my probability of X1 being good.

    Next time I again need a product of a type X. I could buy X1 or something else. What are the costs of each choice? Based on my previous experience, the probability of X1 being good is greater than probability of a random X2 being good. If I choose X1 again, I save my time and attention, and I have a higher probability of getting a good product. If I choose X2, I could save some money, and possibly discover something even better than X1.

    Depending on circumstances, buying X1 may be a rational choice. The price difference could be small, my attention valuable, and if X1 is already pretty good, the possibility of X2 being significantly better than X1 is very small.

    Even if the difference between X1 Cola and X2 Cola is nonexistent, let’s assume there is also another X3 Cola which is really bad. An agent that always buys X1 Cola will be always satisfied. An agent that buys a random cola will sometimes end up with X3 Cola, and that is a worse outcome. An agent who chooses randomly between X1 Cola and X2 Cola, but avoids X3 Cola, gets the same utility as the first agent, at the cost of more memory and attention.

    On the other hand, if X1 and X2 are equivalent, but X1 is a bit more expensive, then buying X1 once may be better than buying X2 once, but buying X1 thousand times is worse than switching to X2. So the optimum strategy would be to mostly stick with the known brands, but once in a long time randomly try a new brand, and switch loyalty if the new brand shows superior. Which could be consistent with the experimental data.

    • http://overcomingbias.com RobinHanson

      Yes of course *some* degree of brand loyalty would make sense in pure info terms. But the observed degree seems much larger.

      • John

        Seems, Robin? How is that scientific exactly?

      • Robert Koslover

         Yes, I am loyal to a number of brands, but I really, truly, don’t care at all about signaling to others (with only a very small number of exceptions, for either supporting or boycotting organizations in regard to certain political issues) as part of my buying decisions.  Again, I don’t care what the name is on the label.  What I want is, quite simply, high quality and high predictability/reliability, ideally at a good price.  I am loyal to brands that provide that.  And if/when they fail unacceptably, I drop my support for them!  If they fail badly enough (and once or twice may be enough in certain cases), then I can become anti-loyal to them.  I.e., if you ever sell me a bad product, or wantonly produce a bad product or service, or misrepresent your produce or service, then yes, I will definitely hold it against you.  Show a pattern of that behavior and I will *never* purchase from you again, regardless of how low the price goes.  There exist several companies whose products I have not purchased now for decades, and will likely never do so.  Burn me once, shame on you.  Burn me twice, shame on me.  On the other hand, if you provide a good product/service, at a good price, and sell it without resorting to lies and deceit, then you will earn my loyalty — and rightfully so!  I purchase from those kinds of companies again and again.  That’s what “brand loyalty” means to me.

      • VV

         That makes sense, but it doesn’t really explain brand loyalty in products which are commodities of largely uniform quality.

        Medications are a prime example, as the unbranded ones are chemically equivalent to the branded ones, and the production quality is most likely also equivalent, due to strict regulation and liability for failures.

        That also applies to many types of processed food: a typical unbranded cola doesn’t taste much different than Coca Cola, and most people wouldn’t be able to distinguish them in a blind experiment.

      • http://juridicalcoherence.blogspot.com/ srdiamond

         My harmless post keeps getting filtered as spam. I wrote, responding to Robin,

        Intuitions loyalty that would make sense informational terms may be biased downward by ignoring a subtle roadblock to choice: decision fatigue. ( http://tinyurl.com/arg4ttq

        It was “rejected” three time. If it sticks this time, then the “censor” deals differently with blockquoted matter.

        It wasn’t this time I am substituting some words.

      • VV

         I can see your original post posted twice

  • burger flipper

    Posted from my iPad.

  • VV

    Let me suggest that an important use of brands is to create and signal identities.
    We create a coherent understandable idea of the kind of person we are,
    integrated with the kind of products we use, and we prefer not to change
    that concept, so that others can continue to rely on their expectations
    about us. We are willing to pay higher prices, and neglect info about
    quality, in order to keep a persistent style and appearance. So brands
    are naturally more important for products we use that others see more,
    and where ads have made connections to identity more salient.Let me suggest that an important use of brands is to create and signal identities.
    We create a coherent understandable idea of the kind of person we are,
    integrated with the kind of products we use, and we prefer not to change
    that concept, so that others can continue to rely on their expectations
    about us. We are willing to pay higher prices, and neglect info about
    quality, in order to keep a persistent style and appearance. So brands
    are naturally more important for products we use that others see more,
    and where ads have made connections to identity more salient.

    It seems that you’ve discovered what advertisers have known for decades.
    Just look at any commercial. There are commercials that just promote the brand without ever showing the product.

    • Axa_maqueda

      it’s not discovery, it’s “proof”………..when people on CERN find something, are you gonna say “theoretical physicists have know this for decades”?

      • VV

         ”Let me suggest” don’t seem the appropriate words to introduce a proof.
        Hanson is making an hypothesis, my point is that this hypothesis has been the working hypothesis of the whole advertising business for decades.

      • http://twitter.com/mtraven sɹǝʌɐɹʇ ǝʞıɯ

        Yeah really, maybe the next post will be along the lines of “Pope Catholic, Bears Shit Woods”. I guess Hanson still works under the base assumption that people are hyper-rational and any observed deviation from that is novel and interesting. 

        That is charmingly obtuse, and I’m guessing it stems from the underlying desire to replace politics (in which branding and loyalty play an even bigger role) with markets. Looks like that doesn’t work since the same stubborn human patterns emerge there as well.

  • Jason

    I do want to say that one particular piece of brand loyalty regarding food is not measured. It’s not just taste, but the food chemistry that matters. I trust Land O Lakes butter to melt a certain way at a given heat and deCecco pasta to reach my preferred level of doneness with the time on the box. I also trust those brands to behave as they do given an assortment and experimentation is time consuming. I do try new brands if my typical ones aren’t available. If it works well and is cheaper I may switch.

    • Offbooze

      You trust Land O Lakes butter to melt a certain way?  Is there something besides butter in it?  Otherwise, I’m certain the melting point will be the same as generic butter.

      • AnthonyC

        Butter and pasta are not homogeneous substances- Jason has a point in general. Different sources of milk and production methods of butter and fillers will produce variations in taste, texture, and yes, the way it melts and so on. (Btw, substances containing more than one compound don’t have a fixed melting point, they usually melt gradually over a range of temperatures, and the composition of the liquidus and solidus phases during melting vary continuously as temperature rises – phase diagrams get a lot more complicated).

        Similarly, the ingredients in pasta may be the same, but “flour” is a very variable thing, and different pastas cook differently and have different textures and so on. In this case (more so than with butter) I am quite certain that Jason’s point has merit.

  • beoShaffer

    http://www.amazon.com/The-Power-Cult-Branding-Customers/dp/0761536949 Talks about this phenomena and how to exploit it.

  • Anonymous

    Meh, I don’t think people consistently buy the same brand of butter in order to signal a specific identity.  It seems more likely that people just stick to what they know and are comfortable with.  But that would be too simple, right?

    • Anonymous

       http://en.wikipedia.org/wiki/Mere-exposure_effect

  • Drewfus

    A large fraction of consumers buy branded medications, even though chemically equivalent generic substitutes are available at the same stores for much lower prices.

    When people do this, we call it ‘brand loyalty’. The definition of brand loyalty is ignoring cheaper, yet equivalent substitutes, in favor of a more expensive and strongly branded option. Same thing expressed differently. When a definition and a referent are identical, the definition is circular. ‘Brand loyalty’ explains nothing – it is just an activity label, but a psuedo-explanation for that activity.

    Firms compete at the individual product level, but also at the reputational level. Reputation concerns the predictablilty of quality of new products, and the maintenaince of production quality of existing products. Brands are associators for reputational mechanisms. Generic brands lack a strong branding association, so the reputational strength of these brands is compromised. Advertising a brand, or promoting a product as an “excuse” for advertising a brand, is a way of promoting a commitment to high reputation. Reputation is partly tangible. ‘Good will’ is an element of the firms market value. Consumers are prepared to pay extra for products by firms with high reputation, just as those who purchase companies are prepared to pay extra for ‘good will’.

    Companies thereofore have incentives to maximize their reputations, from both a customer and assets perspective. How these incentives interact with and are affected by product related regulations such as minimum standards, is worth considering.

  • Michael Caton

    It’s been observed that in recent years there seems to be a movement toward establishing our identities based on what we consume (branded items that others see being one part of that) and away from what we produce, and that this is not a good thing.

  • Nikki

    Didn’t George Akerlof right an entire book about exactly that? http://www.amazon.com/Identity-Economics-Identities-Well-Being-ebook/dp/B0039M97NC/ref=sr_1_3?ie=UTF8&qid=1353332055&sr=8-3&keywords=identity+economics