Trademarks and the Boundaries of the Firm

Article excerpt

ABSTRACT

Coase's theory of the firm has become a familiar tool to analyze the structure and organization of businesses. Such analyses have increasingly focused on property-based theories of the firm, including intellectual property. In previous work we have discussed the application of this model to patents, copyrights, and trade secrets. Here we take up the theory of the firm with regard to trademarks, which act as signals of firm reputation, and so have application and effects that differ substantially from other forms of intellectual property. Using the framework from our previous analyses, we examine the propensity of trademarks to lower transaction costs between firms, as well as within firms, suggesting that such doctrines will have significant effects on the size and structure of the firm.

INTRODUCTION

Modern commerce functions in a sea of trademarks. Consumers depend upon such marks to identify goods and services and increasingly adopt the marks to communicate loyalty or allegiance to preferred brands of goods. (1) Consequently, firms spend billions of dollars each year in developing, establishing, promoting, and maintaining their trademarks in the marketplace. (2) A recognized trademark is frequently the most valuable asset held by the modern firm. (3)

In this paper we consider certain aspects of this latter dimension of trademarks: their value as assets and their place in the firm. Although trademark law traditionally contemplates the welfare and perceptions of consumers, (4) we will be largely unconcerned about the benefits or effects of trademark law on consumers, except as an indirect factor in our primary analysis. Instead, we will focus on the manner in which the legal existence of such assets, and by which the legal regime for control of such assets, may affect the size and structure of economic firms. We will argue that the law allocating the use of trademarks has an important effect, and sometimes a profound effect, on the contours and organization of firms.

In previous work we have considered how other forms of intellectual property, particularly patents, copyrights, and trade secrets, might influence the size and structure of firms, and ultimately of entire industrial sectors. (5) Our earlier analysis assessed these types of intellectual property using the theory of the firm, particularly property-based theories of the firm. (6) However, we purposely set aside trademark law due to its differences from other forms of intellectual property, intending to take trademarks up separately. We take up that delayed inquiry here, applying to trademarks the analytical framework that we previously developed, while taking into account the unusual aspects of trademark law that differentiate them from other forms of intellectual property. We suggest here that trademarks may have purposes, and certainly have effects, not only as a signal to consumers, but also as a set of exclusive rights around which organizations will be structured. Our discussion in this Article is primarily directed to the standard law of trademark confusion, while recognizing that trademark has in the last decade begun to incorporate other theories of infringement. (7)

In following the framework we have previously employed for considering the effects that exclusive rights have upon the size and structure of firms, we consider the differential between transaction costs inside and outside the firm, recognizing that it is possible to have exclusive rights that are too strong or too weak in either dimension. (8) We briefly review this approach, as well as some salient features of trademarks, in the first section. Using this background, we then look at trademarks, first as an asset allocation mechanism that may lower the transaction costs within a firm, and then as an asset allocation mechanism that may lower transaction costs between firms. We emphasize that the asset being allocated in the case of trademarks is the reputational capital of the firm, more than the trademark itself. …