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Monday, 14 November 2011

Katonomics 2: An Economic Perspective of IP: The Economics of Trade Marks

"Never mind the brand -- just
tell me how I can get out of this tin!"
Another slice of Katonomics. The IPKat welcomes new readers who may be unfamiliar with the term 'Katonomics' and reassures them that it's nothing sinister: it's just title of the promised mini-series on IP economics for IPKat readers -- the vast majority are not (yet) economists. This series is brought to you by the IPKat's own Katonomist, Nicola Searle, whose first essay on economics for IP folk, An Economic Perspective on IP: The Social Contract Theory of IP, was warmly welcomed and attracted a large volume of readers' comments (which you can read at the foot of that feature). 
This week Nicola tackles a delicate subject if ever there was one, the way economics looks at trade marks.  This is what she has to say:


An Economic Perspective of IP: The Economics of Trade Marks 
A number of commentators in my previous post quite rightly noted that social contract theory is not the one-size-fits-all theory it’s made out to be.  Social contract theory, or the more general concept of incentives to innovate, struggles with some IP rights such as trade marks.  One solution is to argue that trade marks fundamentally differ from patents and copyright and shouldn’t be lumped together.   Let’s take a look at the economics of trade marks. 
To begin with a cost-benefit analysis of trade mark policy, the benefits to the rights holder stem from the exclusive right to the trade mark.  The assumption is that the rights owner will have invested resources in developing and maintaining a brand and trade marks associated with the brand.  The exclusive rights associated with trade marks help prevent appropriation of the trade mark by others, which would diminish the value of the investment. Further analysis of the relationship between marketing, branding and trade marks can be found in Steven Schwarzkopf’s paper here.
The benefits to society stem from a combination of information asymmetry and information gathering costs (or search costs).  In information asymmetry, noted by the brilliantly named Nicholas S. Economides, it is assumed that the consumer of a good or service knows less about the good or service than does the producer.  Branding and trade marks allow the producer to signal information about the good or service. 
Information gathering (search) costs are related as trade marks benefit consumers by decreasing these costs.  Knowledge about a brand, as communicated through a trade mark, means that a consumer saves resources when making a purchasing decision.  The trade mark serves as an efficient communication symbol.   For example, when looking for an early morning coffee, you may scan the high street looking for a familiar Starbucks or Costa logo.  Instead of researching the attributes of a particular good or service, the consumer may instead search by trade mark.  
... but is it?
Imagine a supermarket trip with no protection for trade marks.  Chocolate manufacturers have decided that customers are willing to pay more for Cadbury’s Dairy Milk and have labelled all milk chocolate as such.  How do you identify the correct chocolately goodness?  Trade marks aid product identification and differentiation, communicate information about a good or service and provide producers with an incentive to maintain a certain level of quality. 
Trade marks and brands also serve an interesting social function.  The social interaction of status signalling and conspicuous consumption allows us to use consumption to signal status.  Visible trade marks make for easy signals. Rather than researching a person’s status, we infer a level of status from the brands we observe. There is a reason why Fake Fendis exist. 
The direct costs of trade mark policy stem from the costs of running the system (e.g. registrations, enforcement costs) and are similar to those of patents and copyright.  Potential indirect costs such as creating barriers to entry can be attributed to more general branding activities and not necessarily trade marks specifically.  Landes and Posner, in a foundational paper, call the costs of trade mark policy “modest.” 
But how does this fit into social contract theory? When patents and copyrights expire, they become part of the public domain where they may spur further innovation.  Theoretically, trade marks can last forever. However, their protection may end if the trade mark is not maintained or becomes generic.  In the generic case, the trade mark must have become a common expression (Landes and Posner note that here we delve into economics of language).  The trade mark becomes so beneficial as a means of communication to society that it loses some of its protection. 'Escalator' is a classic example; another is 'heroin'. If you’d like more examples, I suggest you try internet-search-engining-it. 
Thus, far we’ve addressed costs, benefits and public domain aspects of trade marks. However, the argument remains somewhat unsatisfying. You’ll note that I have conspicuously avoided the term “innovation.”  If economists see IP as a policy to provide incentives to innovate, then where is the innovation in trade marks? Landes and Posner argue that trade marks exist to promote efficiency, and not necessarily innovation. The UK IPO published a report this summer, by Christine Greenhalgh and the late Mark Rogers, which very neatly argues that trade marks are correlated with innovation.  They argue that trade marking activity by firms is related to new or improved processes or services.  A paper at this year’s EPIP event by Lee and Jerome Davis also argues that trade marks are associated with innovation by firms.  Potentially, trade marks serve to protect innovations that may not meet the novelty requirements of other IP rights.  However, the general consensus of economists is that trade mark policy is not fundamentally about incentives to innovate.  Indeed, a key book on incentives to innovate does not address trade marks. 
Based on the above analysis, trade mark policy is beneficial from a cost-benefit perspective and has some elements to satisfy the social contract theory.  However, trade marks do not appear to be a good fit for social contract theory as a whole. So, what, dear readers, do you think?  Does trade mark policy function so differently from that of patents and copyright that we should not lump them together?  Are trade marks the exception to the rule? 

7 comments:

Jackie Maguire said...

If it is to be argued that every piece of IP is individually different because by its very nature it can be distinguished from the prior art - and indeed a Trade Mark must be distinctive to be registered - then perhaps it can be argued that all REGISTERED Trade Marks ARE associated with innovative activities?

IPnerdette said...

I definitely agree with the consensus that trademarks are not here as an incentive to innovate. It is a means for a) companies/owners to charge a premium for their products and b) consumers to be aided in their decision-making process.

The suggestion that trademarks aid the innovation of new processes or services is, in my opinion, secondary to the reasons I listed above.

As an aside - trademarks add something to society even when it is not in the public domain - it adds to language. One only needs to think of something being described as the 'Rolls Royce of [insert product category here]' to understand the impact that trademarks have on our daily communication.

Anonymous said...

Trademarks exist to distinguish. Their use to charge a premium or to aid the consumer stem from this ability to distinguish.

The economic benefits also stem from this ability to distinguish. If a company develops a product that is successful with consumers, who come to recognise and distinguish by way of the brand, is subject to competition from poor quality copies using identical branding then obviously that company will fail to the detriment of the economy. It is parasitic behaviour that rapidly kills the host.

The clumping together of IP rights on the grounds of social contract theory is an after-the-effect categorisation. They are different, they have their flaws and benefits, but they are IP rights. No further categorisation to satisfy economic theorists is necessary.

Darren said...

To add to this conversation - Afro Leo's thoughts are posted here: http://afro-ip.blogspot.com/2011/11/iprs-in-developing-countries.html

Anonymous said...

I think that trademarks have an indirect relationship with innovations. The manufacturer uses the mark to remain a part of consumer awareness only for its products. Thus, it is differentiated from other competitors.
By the trademark every manufacturer has a permanent position in the market, ensuring that he can earning from it.

Ventsi

שרון said...

what about the unfair compettion prevention rationale, which dominates trade secret IP rights as well?

Jonathan Turner said...

The key point is that trademarks enable and promote competition on quality, as the CJEU has accurately observed. More generally, IPR enable and promote some forms of competition (in innovation and quality) at the expense of other forms of competition (in production and distribution). Without IPR the balance would favour competition in production and distribution (at any rate if property rights in tangibles are recognised) at the expense of competition in innovation and quality (there would be no striving to better other operators if one can just nick their innovation or trade off their reputation). See my book "Intellectual Property and EU Competition Law".

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