We link both marketing and transaction cost economics (TCE) literature to explain factors determining brand equity from the buyer's perspective. We argue that TCE offers an appropriate framework for understanding the value added by each brand name. We claim that brand names are more valuable by buyers when contractual hazards (opportunism) in the transaction are higher. Results from an exploratory analysis of fourteen EU fruit and vegetable brand names indicate that the price premium (as a proxy for the brand equity) will be greater when the brand name addresses less informed parties and when search/measurement costs are substantial. Furthermore, consumers seem ready to pay a higher price premium for co-branded products. We consider this as an indicator that each brand name is specialized in guaranteeing different attributes and that they complement each other.
How brand equity operates is one of the most interesting questions academics have tried to explain.1 Marketing researchers argue that brand equity is made up of assets such us loyalty, awareness, perceived quality and brand associations (Aaker, 1992). These assets provide value to the customer as well as to the firm. On the one hand, they improve the firm's efficiency by reducing marketing costs and improving prices and margins. On the other hand, they help a customer to interpret and process information about the product and also affect the customer's confidence in the purchase decision. Assessment of brand equity has been shown empirically through both consumer/buyer surveys (see, for example, Erdem et al., 2002, Keller, 1993, Mudanbi, 2002, Netemeyer et al., 2004, Rao & Bergen, 1992, Río et al., 2001, Sethuraman & Cole, 1999 and Skuras & Vakrou, 2002) and interviews of managers for national or regional retail chains (see, for example, Collins-Dodd & Louviere, 1999 and Nijssen & Van Trijp, 1998).
However, it is worth noting that although marketing scholars have applied transaction cost economics (TCE) to a wide range of marketing phenomena,2 this has hardly been used to explain brand equity. This is despite the agency theory arguments of Klein and Leffler (1981)3 whereby companies develop reputational capital (brand names) to solve informational asymmetry between producer and consumer. Since quality is usually difficult to evaluate before the purchase (especially in agrifood), the producer repeatedly provides the promised (high) quality in order to show that he is not exploiting his informational advantage regarding the actual quality. In exchange for this guarantee that he will not be cheated, the consumer is willing to pay higher prices than he would for a similar quality product without this guarantee. The difference between these two prices constitutes the “premium” (Klein & Leffler, 1981) that should, in equilibrium, offer a normal return on investments in reputational capital. Menard (1996) also constitutes a noteworthy contribution to understand branding from TCE perspective because he links the success of a brand name (“Label chicken”, a government-protected certification of quality) with the use of a hybrid mechanism of governance to reduce the particular asymmetric information problem of consumers of “battery-reared' chickens” in the late sixties in France.
The aim of this paper is to bridge both marketing and TCE literatures, determining factors that explain brand equity and why consumers are willing to pay an extra price for a product. We show that TCE can be helpful for understanding these marketing problems. Using price premium as a proxy for brand equity, we extend Klein and Leffler's (1981) argument to claim that brand name is more important in situations in which transaction costs are potentially higher because of asymmetric information, high search/measurement costs, unreliable quality control and absence of co-branding. The buyer is worried about being cheated in these situations and he positively valuates brand names, being ready to pay a price premium.
The paper is organized as follows. First, we set up the TCE conceptual background that may be applied to typical marketing problems such as guaranteeing product quality. Second, we define the research propositions. Evidence to back our arguments is shown in fourteen case studies from the European fruit and vegetables sector that are described in Section 4. The research propositions are discussed in Section 5. Section 6 concludes and points out the main limitations and the path for future research.
This paper has tried to explain when brand names are most
valuable from a buyer's perspective. In contrast with previous
literature, we have used the Transaction Cost Framework as our
analytical tool, showing its capacity to bridge marketing and
TCE approaches to this problem. Our main argument is that the
ability of a brand name to solve situations in which transaction
costs are potentially high increases brand equity. We claim that
brand names are more important, and likely more valuable for
buyers in the presence of asymmetric information problems,
high search/measurement cost, independent quality controls and
existence of co-branding.
First, a brand name is less valuable when the recipient of the
brand does not show a substantial informational disadvantage,
as in business to business transactions, than when the brand
name addresses the end consumer
—
who is usually less
informed about the real quality of the produce. Second, when
it is difficult to assess quality because of high search and
measurement costs (numerous, small pieces, fragility and
perishability), brand name will be more valuable by the buyer
because the brand name saves on such costs. Third, brand equity
will be higher if external and independent control systems have
been established as these are perceived by the consumer as
proof that the firm is not trying to cheat. Finally, the greater the
specialization and the higher the number of quality signs, the
higher the added value for the consumer. This is because each
brand specializes in assuring a different type of quality aspect
(homogeneity, organoleptic attributes, safety,
...
), giving the end
consumer greater certainty about his purchase.
Due to the lack of a strong theoretical background regarding
both the problem and the theoretical tool, we have used a case
analysis approach. Consequently, our results should be taken
with caution since they require more formal validation. They
can be considered the result of an exploratory analysis in which
we show the direction of some relationships and propose some
interesting open questions. Following some classic guide lines
on case analysis, we selected fourteen brand names from seven
different EU countries in order to cover the most relevant brand
names and to offer a broad overview of the fruit and vegetables
sector in the EU. This heterogeneity partially guarantees that
neither the produce nor the country bias conclusions about
brands, and that most of the theoretical situations (the value of
different kinds of brand) are considered.
Results broadly support the argument that the higher the
contractual hazards, the higher the price premium, which can be
considered as a measure of the brand equity. Particularly, the
most robust results are, first, that the price premium is larger
when the brand name is directed at the end consumer instead of
at a business-to-business brand name. Second, we have also
found that price premium is higher when produce is difficult
(high search/measurement costs) to assess. However, we have
not found clear evidence on the positive link between price
premium and the rigour (independence and exhaustiveness) of
quality controls. Plausible explanations are that almost all
brands say they have a similar type of control (external and
independent) and that final consumers are not very aware of which controls are the most reliable. However, we do not have a
good explanation for the low assessment of controller
independence. More research is need on this. Finally, all firms
presenting more than one type of brand name (Geographical
Indicators and private brand names) show substantial price
premiums. Statistical results tie in with this, indirectly
supporting our argument that different brands can be comple-
mentary. Again, more research is needed to understand why and
when co-branding appears. Our suggestion that the private
brand complements the Geographical Indicator by covering its
errors and guaranteeing homogeneous quality should be
checked in other industries.
As a final point, our work is not free of limitations. First, we
are aware that many aspects of brand equity fall outside our
Transaction Cost Economics approach. This is the case, for
example, of the emotional attachments and image aspects of a
brand name. Producers' publicity strategies may create needs in
the consumer mind that are difficult to relate to the idea of a
brand name as a tool to reduce contractual hazards. We should
therefore consider our paper as a complementary approach to
other ways of studying brand equity. Second, our buyer's
perspective does not allow us to suggest a financial valuation of
each brand as do owner's perspective. However, we think it
helps solve a problem that arises with the owner's approach:
how to ascertain the percentage of revenue that can be credited
to a brand. The price premium may be an estimate of this
percentage. Third, the proxy we have selected for measuring
brand equity, price premium, does not collect all brand equity
facets, but it is probably the best single measure for brand
equity. Finally, we cannot offer statistical validation of our
arguments because we have not conducted a quantitative study.
This is an important item on our future research agenda and we
hope it will help shed light on why consumers do not have faith
in controller independence and how complementarity among
co-brands works.
