Trademarks promote economic efficiency in the marketplace in at least two ways: (1) trademarks encourage businesses to create, manufacture and promote quality products, and (2) trademarks reduce customer costs related to shopping and making purchasing decisions. .
UCLA economists A. Alchian and W.R Allen co-authored Exchange and Production: Competition, Coordination, and Control. The authors make the following important point:
Brand names and trademarks become associated with expectations of a particular quality. Reputations based on consistent past performance economize on the costs of information about the anticipated performance of a good. Thus consumers will sensibly use the brand name or reputation of the maker as a basis for choice. The greater are the possible losses from poor performance of a good, the greater is the value of that brand name as a predictor of quality of performance. Without brand names or other means of identifying makers, consumers would face larger risks and incur greater costs of information.
The point to take away from this statement is that trademarks reduce the customer’s cost of acquiring information about products and services. Information, and the time required to acquire it, are not costless. The authors emphasize that reliance on brands with strong, identifiable trademarks is not “irrational” behavior. The authors make the following important point:
To think that information is costless and freely available is equivalent to thinking that steel is costless and freely available. … [F]or some inexplicable reason, people often talk as if information were—or should be costless. … A powerful reducer of the costs of information about the qualities of products is the brand name. … [A]s labeling has become cheaper and shoppers’ time has become more valuable, branding has increased as a cheaper means of indicating quality. … The more difficult it is to predict the performance of a good at the time of purchase, and the more serious the consequences of deviations from expectations, the more one will rely on the reputation of the seller—which is intelligent economic behavior.
Therefore, customers benefit because they don’t have to do exhaustive research or even spend extra time looking at labels before making a purchase; customers know, based on a strong, identifiable brand name, that a product has the features they desire.
Judge Posner summarized this economic view of trademarks:
The fundamental purpose of a trademark is to reduce consumer search costs by providing a concise and unequivocal identifier of the particular source of particular goods. The consumer who knows at a glance whose brand he is being asked to buy know whom to hold responsible if the brand disappoints and whose product to buy in the future if the brand pleases. This in turn gives producers an incentive to maintain high and uniform quality.
Thus, trademarks are incredibly important from an economic standpoint insomuch as they encourage businesses to produce and sell high quality products and services, and they significantly reduce customer costs of finding products and services with a certain level of quality and performance.
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