The Economic Functions of Trademarks

From an economic standpoint, a trademark is a source identifier that allows consumers to identify goods or services that have been successful (or have a good reputation) and reject goods or services that have failed (or have a bad reputation).  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 for information.

Trademarks Identify the Source of Successful Quality Products

The point to take away from the statement above is that there is an obvious nexus between trademarks and quality.  Trademarks effectively reduce the customer’s cost of acquiring information about products and services.  For example, the authors emphasize that reliance on brands with strong, identifiable trademarks is not “irrational” behavior by making the following important point:

To think that information is costless and freely available is equivalent to thinking that steel is costless and freely available. … For 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. … As 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, purchasing consumers benefit because they don’t have to do exhaustive research or spend extra time researching brand labels before making a purchase; customers know, based on a strong, identifiable brand name, that a product has the features they desire.

Judge Posner (who is an American jurist (United States Court of Appeals for the Seventh Circuit – 1993- 2000 and economist who is a senior lecturer at the University of Chicago Law School) 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, registered 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.

Trademarks Identify the Source of Poor Quality Products

As noted above, successful quality products found in the marketplace is the result of the use of trademarks.  If a business has established a good reputation as anything from a weighted blanket manufacture to a medical practice, it has an incentive to continue to produce a quality product or service by associating itself with its unique trademark symbol.  Stated differently, the anonymously produced product or service will most often be inferior to the product or service identified by a reputable trademark.  The Supreme Court noted that trademark protection “helps consumers identify goods and services that they wish to produce, as well as those they want to avoid.” (Matal v. Tam, 137 S. Ct. 1744, 1751, 198 L. Ed. 2d 366, 45 Media L. Rep. (BNA) 1849, 122 USPQ 2d 1757 (2017).  To that end, if a business makes mistakes in crafting its products or blunders its consumer services, consumer will effectively stop buying its products and services and will be eventually pushed out of the marketplace.

Free Riding on the Quality Reputation of a Reputable Trademark Owner

From an economic point of view, a free rider is a person who enjoys the benefits of an activity without paying for it. Free riders are a problem because while not paying for the good or service, they may continue to access or use it. A trademark infringer is considered a free rider. As applied to the law of trademarks, a trademark infringer is one who consciously uses a confusingly similar trademark in the marketplace to deceive consumers and gains business by taking a free ride on the trademark owner’s mark and reputation. If such an infringer cannot be stopped by the law, the time and cost in establishing a reputable brand identify through the provision of quality products and services is destroyed. If a trademark infringer could use a confusingly similar mark and thereby take a free ride on the successful trademark owner’s identity and brand reputation, there would be little incentive to invest in maintaining quality goods and services.

The Supreme Court in Qualitex Co. v. Jacobson Products Co., Inc. (1995) stated:

“In principle, trademark law, by preventing others from copying a source-identifying trademark, reduces the customer’s costs of shopping and making purchasing decisions, for it quickly and easily assures a potential customer that this item – the item with this trademark – is made by the same producer as other similarly marked items that he or she liked (or disliked) in the past.  At the same time, the law helps assure a producer that it (and not an imitating competitor) will reap the financial, reputation-related rewards associated with a desirable product.  The law thereby encourages the production of quality products…and simultaneously discourages those who hope to sell inferior products by capitalizing on a consumer’s inability to evaluate the quality of an item offered for sale.”

Contact our Chicago Trademark Lawyers

Our trademark lawyers in Chicago provide counsel to those individuals and businesses that are serious about developing and protecting their company name, product names, service names, logos, and taglines. We assist clients in all aspects of the trademark process, from the trademark selection to its registration. Our law firm provides guidance to any entrepreneur or business in the process of launching their new product or service in the marketplace and will ensure their trademarks are properly cleared and protected.  If you or your business has trademark needs, please do not hesitate to call, email or complete one of our contact forms.

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