· October 29, 2018

A good brand can increase the value of a product. Aswath Damosaran I recall used the example of Coca Cola’s margins being significantly higher  than that of a Canadian soft drinks producer as being driven by the power of the brand. Companies invest significant time and money in their brand, even well outside of FMCG, because of the sustainable, defensible advantage that comes with a strong brand. 

Returning to my thinking other day, is that waste? Turns out there is quite a good paper on the economics of trademarks, which ends up summarising the main benefits and costs. Benefit wise, it’s largely signalling of unobservable elements: 

 Where experience goods have unobservable differences in quality andlor variety, trademarks enable consumers to choose the product with the desired. combination of features and encourage firms to maintain consistent quality and variety standards and to compete over a wide quality and variety spectrum.

The paper leans towards trademarks being positive, and has a compelling argument:

 Frequently criticized for anticompetitive effects, trademarks make competition in perception advertising possible. However, distortions of perfect competition arising from perception advertising can occur. Competition in perception advertising without intertemporal effects will result in a higher number of brands than is optimal. However, in an exogenously growing market, the existence of small intertemporal effects of perception advertising (i.e., the existence of brand loyalty) can be beneficial because it restricts, through the creation of small barriers to entry, the number of brands towards their optimal number.

This argument is largely that, yes, trademarks create barriers to entry and therefore limit competition, but that in cases of growing markets in particular the tendency is towards too many small brands with inefficient unit production, and hence brands can help correct for that. 

My main quibble with the argument is that it hinges on the fact that perceptual advertising and branding work are based on a foundation of unobservable features of the product. There are places where I think that is true in all cases, for example consistency over time. However, I am concerned that a large percentage of advertising is second level social signalling, and that there is a degree of exploitation of largely unconcious human biases in that - e.g. that the products do not in fact satisfy the underlying social goals. 

Definitely an area where I would be interested in reading more research!