I. THE FUNCTION OF TRADEMARKS: A TRADITIONAL LAW
AND ECONOMICS APPROACH
II. THE LEGAL EVOLUTION AND THE NEW PROTECTED
FUNCTION OF TRADEMARKS
III. TRADEMARK PROTECTION AND PRODUCT QUALITY
IV. TRADEMARK PROTECTION, PRODUCT QUALITY, AND
V. BRAND EXTENSIONS AND PRODUCT QUALITY
VI. FREE RIDING AND TRADEMARK DILUTION
Legal evolution evidences that trademarks are currently protected not only to avoid consumer confusion, but also to provide firms with an adequate return on investments made to create and maintain strong brands. However, the rational basis of this development is subject to question and review. While free riding on a famous brand may, indeed, generate negative spillover effects, such as trademark dilution, and this may, in turn, reduce the incentive to invest in trademarks, this Article seeks to illustrate that such investment cannot be seen as indicative of product quality. Indeed, this Article suggests that the existence of trademark protection does not, per se, create an incentive for continuous improvement in product quality. Not even the signalling argument--specifically, in relation to advertising and brand extensions--can, by itself, justify the extended protection of strong trademarks. In fact, the signalling argument may be invoked only when negative spillover effects are proven and are shown to adversely affect both the senior user of the trademark and the profitability of the trademark in all markets, thereby leading to a reduction of "welfare."
Part I of this Article begins by outlining the function of trademarks from a traditional law and economics perspective. The current evolution of trademark protection and the "new" lawyers' interpretation of trademark functions is addressed in Part II, including a discussion of the apparent conflict between this approach and the traditional view of economists. Part III summarizes the standard economic doctrine regarding trademark protection and argues that this doctrine does not completely address new questions raised, for example, by the existence of "strong" brands and their extensions. Accordingly, Parts IV and V briefly review the economic literature regarding advertising, brand extensions, and product quality. Ultimately, as outlined in Part VI, an extended protection of strong trademarks cannot be clearly explained by the desire to protect high product quality. However, assuming the possibility of trademark dilution caused by free riding on strong trademarks, it is evident that an extended protection can prevent welfare losses when product variety is considered as an important argument of the consumers' utility function. The Appendix at the conclusion of this Article includes additional analysis to illustrate that when free riding leads to an increase in the product classes covered by a famous trademark, then the senior user has an incentive to free ride on his or her trademark.
I. THE FUNCTION OF TRADEMARKS: A TRADITIONAL LAW AND ECONOMICS APPROACH
In the standard literature of law and economics, trademark law is presented as an incentive for business enterprises to invest in the quality of the goods and services with which marks are used and as a remedy to specific market failures. (1) Thus, it is argued that if it were impossible for consumers and for the public-at-large to identify the source of goods, then every business would have an incentive to supply goods at a quality lower than the average prevailing in the industry because the profits generated by the individual transaction would, in fact, be garnered by the individual business entering into it, while the reputational costs derived from the public's disappointment with the quality of goods would be externalized to the entire industry. (2) Accordingly, the adoption of a sign or symbol that consistently links the goods to a source over time is seen as a device to overcome this difficulty. …