Reports

Economic Inequality, Trust, and Brand Leadership

Joshua T. Beck, Colleen Harmeling, Yashoda Bhagwat, and Conor M. Henderson, 2016, 16-109

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Many leading brands have lost value in recent years, despite economic growth, which suggests some common obstacle is impeding brand performance. Prior research has examined how economic fluctuations impact brands (e.g., recession increases demand for private label brands). However, little is known about how economic inequality, which has been rising across the U.S. for four decades, may affect brand leaders. 

In this report, Joshua Beck, Colleen Harmeling, Yashoda Bhagwat, and Conor M. Henderson consider how economic inequality affects brand performance. Specifically, the authors theorize that inequality reduces trust in the economic system, which subsequently erodes trust and performance of brands that seem to wield influence over system-level outcomes (i.e., brand leaders). The authors test these predictions using a four-study, multimethod approach involving field data and controlled experiments.

Findings

The first study uses matched data from 8,790 customers who rated over 1,500 brands across 469 major U.S. cities to demonstrate that, holding market size and customer income constant, city-level economic inequality negatively relates to brand trust and performance, especially as brand leadership increases. Customers reported lower trust, fewer past purchases, and lower future purchase intentions for brand leaders as inequality increased, eroding brand leaders’ performance advantage by as much as 28%.

In a second study where perceptions of (high vs. low) inequality were experimentally altered, the authors find that the negative effect of economic inequality on brand leader performance is bridged by a macro-to-micro trust process, such that: higher economic inequality → lower system trust → lower brand trust → worse brand leader performance.

A third study examines how a brand leader may restore trust and performance by fostering beliefs that the brand is fixing rather than contributing to unfavorable economic conditions. The authors experimentally altered perceptions of inequality, and then recorded trust, purchase intentions, and willingness to pay for a brand leader that (a) sponsored an initiative that signaled economic goodwill by helping low income individuals, (b) sponsored an initiative that signaled non-economic goodwill by helping the environment, or (c) did not sponsor an initiative (as a control). The authors found that signaling economic goodwill (vs. non-economic goodwill or no signal) significantly restored brand leader trust and performance that was otherwise eroded by high inequality. Interestingly, the economic goodwill initiative had negative effects when inequality was low, suggesting that customers may not value such programs where there is no apparent need.

Finally, a fourth study examines the causal role of leadership by experimentally manipulating both perceptions of local economic inequality and perceptions of brand leadership to test their interactive effects on brand trust and performance. The authors replicated the findings above; inequality reduced trust and performance for a leading brand. Also, unexpectedly, the authors found that higher economic inequality increased trust and performance for a non-leading brand.

Managerial implications

By directing attention toward the macroeconomic environment, the authors offer an explanation—rising inequality—for widespread reductions in the performance of leading brands. These results show that local levels of economic inequality impair the performance advantage usually afforded to brand leaders because inequality reduces trust in the economic system, which undermines trust in leading brands. Moreover, the results suggest that to avoid potential impairments caused by high levels of inequality, brand leaders might consider de-emphasizing leadership and implementing initiatives that foster perceptions of economic goodwill. Also, because customers do not value an economic goodwill program when inequality is low, and inequality varies considerably across U.S. cities, these findings underscore the importance of tailoring community investments specifically to local market conditions.

Joshua T. Beck is Assistant Professor of Marketing, Lundquist College of Business, University of Oregon. Colleen Harmeling is Assistant Professor of Marketing, College of Business, Florida State University. Yashoda Bhagwat is Assistant Professor of Marketing, Neeley School of Business, Texas Christian University. Conor M. Henderson is Assistant Professor of Marketing, Lundquist College of Business, University of Oregon.

Acknowledgments
The authors thank Linda L. Price and Robert W. Palmatier for helpful feedback on previous versions of the manuscript, Harris Interactive for access to some of the data, and the Marketing Science Institute for their support.

 

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