NOTES
2. The economic theory of IPRs (patents and trademarks)
2.4 CONCLUSION
2.4.2 Trademarks
The economic theory of registered trademarks is more coherent than that of the patent system. Generally speaking, there is a social need for the creation of product information for consumers. Such information will reduce the purchasing errors of consumers, increase their real income and may even
transfer social resources from inefficient to efficient firms. However, given that information for consumers has the characteristics of public goods (non- rival, non-excludable), it is likely to be under-supplied when left entirely to the market, again due to the problem of free-riding. Thus, as with patents, it is in the social interest to create institutional arrangements for the supply of product information to consumers.
Although trademarks cannot solve the problem of under-supply in information for consumers they are capable of improving the situation. Designed to operate as a method for product differentiation, trademarks are expected to carry out two major functions: the indication of origin and the indication of quality.
The indication of origin, which essentially differentiates between products on the basis of their origins, helps consumers to identify goods that have proved satisfactory, particularly those that can only be evaluated after their purchase (ʻexperience goodsʼ). The indication of quality, which is designed to provide consumers with additional information about the quality of products, can be achieved only after property rights in trademarks are established (for example registered trademarks). This is because consumers are likely to face problems of false information and quality reduction when firms are allowed to free-ride a particular trademark by ʻborrowingʼ and using it for their own products. Since registered trademarks create a direct and exclusive channel of information between manufacturers and consumers, they are likely to increase the incentive of firms to maintain the quality of their products, as this secures brand loyalty.
A given trademark will function as an efficient indicator of quality as long as its reputation is balanced by its actual value. Trademarks cannot be considered efficient indicators of quality when the allocation of resources towards ʻreputationʼ, such as excessive advertising, is at the expense of good value.
Trademarks are also linked to market power. As a method for product differentiation, trademarks may lead manufacturers to behave as competitive monopolists. This would be particularly relevant for firms who regard their trademarks as profit-generating assets, as they are likely to dedicate sufficient resources for the creation of good value in order to secure brand loyalty.
In some cases, known and reputable trademarks can secure a type of monopoly that is closer to that created by patents. When consumers do not have sufficient information on a given class of products they are likely to purchase known brand names in order to avoid purchasing errors. As a result, the owners of reputable trademarks can charge a premium for their products that may be even higher than the additional cost of obtaining information on other competing products. Successful trademarks can also raise entrance barriers against potential competitors, who, facing the high costs of establishing the reputation for their own products, choose not to enter markets in which such trademarks exist.
Finally, if, for a given class of products, trademarks provide information that is in excess of the social need, there is no logic in keeping them in their current form. In the case of generic pharmaceutical products, trademarks create an artificial product differentiation that is likely to cause consumers to be more confused rather than better informed. It would be better to give these products a common and primary generic name.
All the above suggests that the social usefulness of registered trademarks ultimately depends upon the way in which they are used. Trademarks may be considered an efficient source of information as long as they enable consumers to obtain additional and accurate knowledge about different products. When this is not the case, trademarks can easily become a source of useless, inaccurate and even false information.
It follows that a pure economic approach does not provide an adequate theoretical and empirical basis for the establishment of IPRs. Therefore, it is necessary to consider to what extent the internationalization of IPRs is economically justified, or whether it may be explained by a different approach, which is primarily politically orientated.
NOTES
1. Hindley (1971: 1)
2. Distributional aspects are discussed in Chapter 3 3. The TRIPs Agreement, Article 27.1
4. Ibid., Article 28 5. OECD (1993: 29) 6. Ibid., p. 68 7. Ibid., p. 69 8. Nelson (1959: 302) 9. Machlup (1962a: 147) 10. OECD (1993: 70) 11. Machlup (1962a: 162) 12. Kuznets (1962: 20) 13. Sanders ( 1962: 77) 14. Nelson (1959: 299) 15. OECD (1993: 75) 16. Ibid.
17. Arrow (1962: 614–16); Stiglitz (1999: 308–25) 18. Arrow (1962:615)
19. As long as the resources invested in copying are cheaper than those required for purchasing the invention or from conducting a separate R&D to produce it
20. Bentham (1843: 71) 21. Ibid.
22. Polanvyi (1944: 65) 23. Machlup (1958: 58–61) 24. Arrow (1962: 616–17) 25. Ibid., p. 618
26. Hindley (1971: 6) 27. Beck (1981: 91–110)
28. This does not, by any means, imply that there is no logic in having an invention system based upon centralized initiatives. Under centralized initiatives, the payoff structure for inventions is calculated differently as governments, despite being subject to political pressures as well as economic constraints, may still be able to consider calculations of profits in a more balanced manner. In theory, this can reduce the problems of free-riding and secrecy as governments, considering the net benefit for society, will be interested in spreading new inventions as widely and as quickly as possible.
29. Polanvyi (1944: 65)
30. Hindley (1971: 10); For a similar view see also Beck (1981: 103–6); Kitti (1985: 89–90) 31. Polanvyi (1944: 66–9)
32. Machlup (1958: 15)
33. Polanvyi also acknowledges the problem of discretion when arguing that any decision regarding the grant of the reward would be prone to ʻcorruption and arbitrary oppression which is never removed from the grant of public subsidiesʼ (p. 68). Nevertheless, he still holds the view that a centralized reward system, despite its flaws, would not be less fair, to say the least, than the patent system
34. Hindley (1971: 10)
35. Robinson (1956: 87). The term ʻparadox of patentsʼ is mentioned in her table of contents.
36. Hindley (1971: 12–21); See also Machlup (1958); For a more contemporary literature review see: Primo-Braga (1990c: 17-32)
37. Plant refers to the need to invent for the sake of inventing: (1934: 33–4) 38. The Economist (26 July 1851: 812); also see: Penrose and Machlup (1950: 18) 39. Machlup (1958: 24)
40. For a vivid description concerning the transformation of the ʻinventive industryʼ in the corporate era see Kahn (1940 :475–91, p. 481 in particular)
41. Mansfield (1986: 173–81) ; See also: Nogués (September 1990 11–14) 42. See in Nogués (1990b: Table 2)
43. Levin, Klevorick, Nelson and Winter (1987: 783–820); See also Nogués (1990b: Table 3) 44. Plant (1934: 40–42)
45. Ibid., p. 40 46. Ibid.
47. Dasgupta and Stiglitz (1980: 289) 48. Machlup (1962b: 159–69) 49. Ibid., pp. 159–60 50. Ibid., p. 163
51. Barzel (1968: 348–55) 52. Hindley (1971: 8–9) 53. Arrow (1962: 619–22)
54. Penrose and Machlup (1950: 25–8) 55. Penrose (1951: 32)
56. Marshall (1946: 234, footnote 1); also see: Machlup (1958: 32)
57. For the waste of R&D efforts resulting in similar inventions see Beck (1981: 97–103) 58. Machlup (1958: 51)
59. Ibid., pp. 50–52
60. Marshall (1946: 234, footnote 1) 61. Gilbert and Newbery (1982: 514–26) 62. Plant (1934: 43)
63. Hindley (1971: 18) 64. Ibid.
65. The cost curve of other firms, although slightly lower than before, now also includes the amount paid for purchasing the right to use the cost reducing process
66. Nordhaus (1969: 76) 67. Machlup (1958: 66–73) 68. Hindley (1971: 20–21)
69. Nordhaus (1969: Chapter 5); for geometrical interpretations see Scherer (1972: 422–7); also see: Nogués (1990a: 6–9)
70. Nordhaus (1969: 79); Nogués (1990a: 6)
71. Scherer (1972: 423); Nordhaus (1969: 79), Nogués (1990a: 7) 72. Nogués (1990a: 7); Nordhaus (1969: 80–81)
73. Nogués (1990a: 7)
74. Nordhaus (1969: 52, footnote 18)
75. These issues are discussed in length in Chapter 4 76. Discussed earlier in the chapter
77. Primo-Braga (1990a: 73–4) Nogués (1990a: 12–13) 78. Machlup (1958: 8); Nogués (1990a: 13)
79. Hindley (1971: 24)
80. Polanvyi (1944: 70); Engel (1985: 95–101); Kahn (1940: 484–6) 81. Scherer (1970: 391); also quoted in Nogués (1990a: 13) 82. Primo-Braga (1990a: 74)
83. Sherwood (1990a: 182); Primo-Braga (1990a: 74) 84. Machlup (1958: 8)
85. Nogués (1990a: 12) 86. Machlup (1958: 8)
87. Gilbert and Newbery (1982: 514–16); Beck (1981: 97); Primo-Braga (1990c: 21–23);
Machlup (1958: 50–52) 88. Hindley (1971: 27) 89. Edwards (1949: 224) 90. Kahn (1940: 486–7)
91. The inability to exploit the invention does not necessarily have to be the result of lack of production capabilities, such as economies of scale. The larger firm, attempting to ʻfence outʼ competitors, can raise legal difficulties for the smaller one by forcing it to enter into expensive and time-consuming litigation that will prevent it from using the invention. See:
Machlup (1958: 11); Polanvyi (1944: 70) 92. Polanvyi (1944: 70)
93. Hindley (1971: 27)
94. Gilbert and Newbery (1982: 526)
95. For estimates of pharmaceutical figures see: PhRMA (2003: 1–7); EFPIA (1998b: 10); ABPI (1996); Luscombe, Walker, Griffiths and MacFarlane (1997: 193–9); Burns and Pilling (1999:
96. EFPIA (1998b:10)6) 97. Nelson (1959: 303–4)
98. Pilling (1999b); For the preference of pharmaceutical firms to cooperate with academia also see: The Economist Survey of Innovation in Industry (1999a: 11)
99. Pilling (1999b)
100. TRIPs Agreement, Article. 15.1 101. Hindley (1971: 70)
102. UNCTAD (1979: 1–3); Edwards (1949: 3)
103. UNCTAD (1979: 7); In contrast, ʻsearch goodsʼ are products, such as fruits and vegetables, that can be inspected and compared before the purchase, thus reducing the need for identifying marks. For the role of trademarks with regard to ʻexperience goodsʼ see also: Economic Council of Canada (1971: 191)
104. UNCTAD (1979: 1) 105. Schechter (1925: 20) 106. Chamberlin (1947: 249)
107. Edwards (1962: 26); Today it is more common to use the term ʻbrand loyaltyʼ instead of ʻgood willʼ
108. Grossman and Shapiro (1988: 59–75) 109. Ibid., p. 73
110. Economic Council of Canada (1971: 193) 111. UNCTAD (1979: 9)
112. UNCTAD (1979: 7) 113. Chamberlin (1947: 56)
114. Krugman and Obstfeld (1997: 127–8) 115. UNCTAD (1981: 3)
116. Ibid.
117. Economic Council of Canada (1971: 195) 118. Hindley (1971: 71)
119. Ibid.
120. UNCTAD (1979: 32) 121. UNCTAD (1981: 5) 122. Chamberlin (1947: 62) 123. Hindley (1971: 72)
124. According to UNCTAD, ʻa generic name for a drug applies to all those brands of that drug…which contain the same active ingredient, have the same action and can generally be used as substitutes for each other, provided that their qualities have been assuredʼ. UNCTAD (1981: 8)
125. UNCTAD (1979: 38–40) 126. UNCTAD (1981: 8–14) 127. Lunsford (1974: 83) 128. Hindley (1971: 73) 129. UNCTAD (1981: 12) 130. Machlup (1958: 79)