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Monday, 19 February 2018

Here we go again? Strong brands as a barrier to entry, this time from "The Economist"


It was just one line in a full- page, two-column long article that appeared in the January 6th issue of The Economist. Entitled “Schumpeter|The year of the incumbents: In 2018 conventional firms will give Silicon Valley a run for its money”, the piece argues that long-time corporate worthies, such as IBM, General Motors and Walmart, in adopting e-commerce, AI, and big data, are placed to take advantage of their incumbent position in the marketplace to give Silicon Valley upstarts a commercial run for their money. One such advantage is that the incumbents “own 80% of the commercial world’s data", all the better to exploit AI and big data. And then there are—brands. Yes- brands. In the words of the article, “[e]stablished giants also enjoy barriers to entry, such as strong brands …" [Merpel notes, but without any further explanation] This Kat mused: “Can it be”? With apologies to Michael J. Fox, are we about to experience a “back to the future” moment in our understanding of brands and trademarks?

In the 1930’s and 1940’s, particularly in the U.S., it was popular within economic circles to view trademarks in anti-competitive terms. As Jerre Swann, here, quoting Daniel McClure, has well summarized—
“[b]y successfully differentiating a standardized product from competitors’ products and achieving brand loyalty through advertising, a producer could insulate his market share from price competition … [and] create high barriers to entry.”
But this view of trademarks and brands as an anti-competitive weapon gave way in the 1970’s and 1980’s to the so-called Chicago School approach, which argued that trademarks were in a fact pro-competitive means to lower consumer search costs. A “stronger brand” was more likely to convey valuable consumer information, thereby providing a positive competitive advantage, which was reflected in being able to extract a premium price.

In this Kat's view, a watershed moment that embodied this change in approach took place in the late 1970’s, when the U.S. Federal Trade Commission (FTC), by majority vote, found that the Borden company had maintained monopoly power in the processed lemon juice industry (it products having been sold since the 1930's under the “Real Lemon” trademark), but declined to issue a compulsory license requiring Borden to license its Real Lemon trademark to competitors, stating that--
"In sum, given the competitive climate in the processed lemon juice market, we are not persuaded that a restriction on trademark rights is needed to curb the unlawfully maintained monopoly. Prohibition of abuse of the trademark that led to this case should be sufficient to encourage the entry necessary to result in a competitive market". [Merpel notes that the distinction between abuse and monopoly exploitation is worthy of a separate blogpost.]
In so doing, the FTC overruled the administrative law judge, who had ruled that other manufacturers of the lemon juice product be allowed to sell their competing products under the "Real Lemon" mark for a period of 10 years. Since then, the notion of a strong brand, on its own, as a barrier to entry, seems to have faded into the background, at least until recently. But is it so? Can a strong brand per se really function as an anti-competitive barrier to entry?

This Kat's instincts tell him that the question is more appropriately raised in connection with Silicon Valley-like companies. After all, Amazon would presumably like to be the dominant seller of a major chunk of goods and services, all under its house brand. Under such circumstances, might it not be a reasonable claim that the brand itself serves as a formidable barrier to entry? If the answer is "yes", however, the reason is fundamentally about how to treat network effects, which lies at the heart of the market power enjoyed by these companies. Sure, the strong brands identified with these companies reinforce the force of network effects, but the solution, if there are problems to competition, rest with finding a way to deal with network effects. A strong, even a super strong brand, is the symptom, not the cause, of potential anti-competitive conduct by the brand holder. In any event, traditional incumbents, such as IBM, can hardly be said to be the prime beneficiaries of network effects.

Indeed, this Kat has been exploring just how far a strong brand can take a brand holder, not from the vantage of extracting extra-competitive profits, which is detrimental to social welfare, but with respect to the extent that brands can facilitate innovation. His preliminary thoughts (which will be published later this spring) are that only strong brands might have the market ability to do so, but even there, only under uncertain circumstances. If so, there is an irony here—far from concerns over brands as a barrier to entry, strong brands may not be strong enough to do the job that society would like them to do, namely facilitate innovative activity.

By Neil Wilkof

Photo on upper right by Sn1per and is made available under the Creative Commons CCO 1.0 Universal Public Domain Dedication

Photo on lower left by Andre Karwath aka Aka and is licensed under the Creative Commons Attribution-Share Alike 2.5 Generic (https://creativecommons.org/licenses/by-sa/2.5/deed.en) license

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