Brand Names

Consumers always have incomplete information about product availability, quality, and alternative prices. Such “imperfect information” leads them to rely on brand names, which lessen the costs of acquiring product information. By relying on brand names and the company reputations associated with them, consumers can make reasonable purchases without searching or investigating products each time they buy.

Many economists have lamented the fact that consumers put so much reliance on brand names. The problem, as these economists see it, is that this consumer reliance gives companies with established brand names "market power" over the price they can charge. When companies "differentiate" their products with unique brand names and associated advertising and promotional campaigns, they can charge more than others for what these economists claim are "truly" identical products. Brand names lead consumers to make what these economists consider to be artificial distinctions between different products. Companies with respected brand names, therefore, can increase prices without losing significant sales.

Because consumers rely on and pay for reputations, companies have incentives to establish reputations by maintaining and improving the quality of their products. This incentive would be lost if all companies were required by law to sell indistinguishable, homogeneous products. If consumers could not identify the companies that produced the products they bought, individual companies would have no incentive to improve the quality of their products; in fact, each company would have an incentive to decrease the quality of its products. Economist Marshall Goldman has pointed out that this is exactly what occurred in the Soviet Union when brand names were eliminated after the 1917 communist revolution. That is why firms in the Soviet Union were required to identify their output with "production marks." When consumers cannot identify the company that produced what they buy, they have no recourse when they receive a product of low quality. Not only do consumers have no legal recourse, but more important, they have no economic recourse. Without brand names consumers do not know from current purchase experiences which products to buy—and which ones not to buy - in the future.

This mechanism of repeated purchase, where good past performance and a good reputation are rewarded with future profitable sales, and where poor performance is punished.

As a result, companies with superior reputations, representing good past performance and the likelihood of future profitable sales, have something to lose if they perform poorly.

Because companies with valuable brand names that fail to perform have more to lose than companies without valuable brand names, consumers who buy brand name products are necessarily paying for something. They are buying the added assurance that the brand name company will have an increased incentive to take the necessary measures to protect its reputation for quality.

Finally, it is important to recognize that brand names even operate in marketplaces where the government sets product quality standards. The obvious question is: why not rely entirely on government standards to assure company performance? There are two main answers. First, government standards often cannot easily capture some elements of performance. For example, although the government may grade agricultural commodities, such as vegetables, for color, size, and so on, they cannot define and grade characteristics such as taste that are quite important to consumers. Second, government agencies that rate and assure quality are far from perfect.

To assure the quality of the products they buy, consumers are right to rely not just on government standards, but also on brand names.