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?