I n t h I s c h a p t e r y o u w I l L

Journal of Political Economy
in 1960, Marshall
Goldman, an expert on the Soviet economy, described the Soviet experience:
In the Soviet Union, production goals have been set almost solely in
quantitative or value terms, with the result that, in order to meet the plan,
quality is often sacrificed. . . . Among the methods adopted by the Soviets to
deal with this problem, one is of particular interest to us—intentional product
differentiation. . . . In order to distinguish one firm from similar firms in the
same industry or ministry, each firm has its own name. Whenever it is
their use by refusing to enforce the exclusive trademarks that companies use to
identify their products.
More recently, economists have defended brand names as a useful way for
consumers to ensure that the goods they buy are of high quality. There are two re-
lated arguments. First, brand names provide consumers 
information
about quality
when quality cannot be easily judged in advance of purchase. Second, brand
names give firms an 
incentive
to maintain high quality, because firms have a finan-
cial stake in maintaining the reputation of their brand names.
To see how these arguments work in practice, consider a famous brand name:
McDonald’s hamburgers. Imagine that you are driving through an unfamiliar
town and want to stop for lunch. You see a McDonald’s and a local restaurant next
to it. Which do you choose? The local restaurant may in fact offer better food at
lower prices, but you have no way of knowing that. By contrast, McDonald’s of-
fers a consistent product across many cities. Its brand name is useful to you as a
way of judging the quality of what you are about to buy.
The McDonald’s brand name also ensures that the company has an incentive
to maintain quality. For example, if some customers were to become ill from bad
food sold at a McDonald’s, the news would be disastrous for the company.
McDonald’s would lose much of the valuable reputation that it has built up with
years of expensive advertising. As a result, it would lose sales and profit not just in
the outlet that sold the bad food but in its many outlets throughout the country.
By contrast, if some customers were to become ill from bad food at a local restau-
rant, that restaurant might have to close down, but the lost profits would be
much smaller. Hence, McDonald’s has a greater incentive to ensure that its food
is safe.
The debate over brand names thus centers on the question of whether con-
sumers are rational in preferring brand names over generic substitutes. Critics of
brand names argue that brand names are the result of an irrational consumer re-
sponse to advertising. Defenders of brand names argue that consumers have good
reason to pay more for brand-name products because they can be more confident
in the quality of these products.

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PA R T F I V E
F I R M B E H AV I O R A N D T H E O R G A N I Z AT I O N O F I N D U S T R Y
physically possible, it is obligatory that the firm identify itself on the good or
packaging with a “production mark.”
Goldman quotes the analysis of a Soviet marketing expert:
This [trademark] makes it easy to establish the actual producer of the product
in case it is necessary to call him to account for the poor quality of his goods.
For this reason, it is one of the most effective weapons in the battle for the
quality of products. . . . The trademark makes it possible for the consumer to
select the good which he likes. . . . This forces other firms to undertake
measures to improve the quality of their own product in harmony with the
demands of the consumer.
B
RAND NAMES CONVEY INFORMATION TO
consumers about the goods that firms
are offering. Establishing a brand
name—and ensuring that it conveys
the right information—is an important
strategy for many businesses, including
TV networks.