INTRODUCTION :: The motivations for buying a good or service are highly complex. At the most basic level, people buy goods because of what the goods do or because of the aesthetic elements they embody. More technically, buyers derive utility from the “functional” quality of these goods. Another motivation relates to what the goods “say” about the buyer. Here, the good is a signaling device. Signaling is not new, of course, and can indicate anything from social class to political leanings. The means can include anything that is displayed, driven, sat on, worn, or even eaten. Current popular forms include T-shirts, bumper stickers, tattoos, and piercings. In a great many of these cases, buyers and sellers operate in markets that are unassisted by government intervention. That is, the markets for signaling devices exist without government subsidization. The markets for some signaling, however, depend on government involvement to operate successfully. These tend to be markets for products that signify wealth and status. Government subsidization comes in the form of trademark law.
The signaling phenomenon can be understood by thinking of the following hypothetical experiment. Suppose a buyer faces a choice between two polo shirts. There is no doubt in the buyer’s mind that the shirts are identical in terms of fabric, comfort, and durability. One shirt has no trademark on it, while the other bears the mark of “Etro,” a high-end Italian design house. Some buyers will pay a premium for the Etro mark. One way to understand this consumer behavior is to say that the price paid in part compensates for the function of the product-color, fabric, durability-and the remainder of the price is accounted for by non-functional factors. In this case, the non-functional factor is the fact that the logo communicates a message to others seeing the shirt.
This Essay addresses the issue of whether it should be public policy to subsidize this type of person-to-person status signaling. This question falls within the general category of issues related to the production and dissemination of information. As a general matter, it appears that markets, if left unregulated, do not produce efficient levels of information. This is in large measure due to free-riding problems that prevent those producing information from limiting its use to those who pay for it. Free-riding, of course, is the underlying rationale for American intellectual property law. A composer or inventor is protected from free-riding as a means of increasing the incentive to be creative. When it comes to trademark, the focus is less on the producer and more on consumers. The idea is to lower search costs for consumers by reducing the confusion that would result if the trademark identified with one producer or product were then used by another producer. Still, the underlying problem is one of free-riding. A party infringing on the trademark of another free-rides on the trademark owner’s investment in ensuring that labels ranging from McDonald’s to Rolex actually stand for specific qualities.
Given the focus of trademark on consumers’ confusion and search costs, it may surprise some to learn that courts have generally accepted the idea that one role of trademark law is to facilitate status signaling -signaling not about the product or service but about the person purchasing that product or service. Nevertheless, the economics of selling status signaling would, on its face, seem to be no different from the economics of selling other information products. For example, the manufacturer of Etro shirts is selling not just the material and aesthetic qualities of the shirt, but also the right to display the Etro logo. If other producers free-ride by selling counterfeit Etro shirts, they reduce the incentive for Etro to develop and invest in new means for this form of signaling.
The fact that the economic analysis seems to be the same for status signaling as it is for more typical trademark purposes does not mean that a policy of subsidization is easily defended. That defense would have to be based on a belief that, without what amounts to public subsidization, there would be too little information disseminated related to relative status. This belief, in turn, would have to have some underlying economic or moral basis that status signaling is ultimately beneficial, in the case of economics, or a “right,” in the case of a moral or “rights”-based rationale.
An economist attempting to justify a policy or law must demonstrate that the policy will lead to outcomes that are either Pareto superior, utility increasing/maximizing, or wealth increasing/maximizing. These are the three concepts that economists typically use to analyze well-being, with the wealth-maximization standard being the most common. A moral claim for status signal subsidization would be based on a rationale other than creating incentives, but that does not mean there are no trade-offs involved. A moral, rights-based justification could call into question other rights that must be weighed against those supporting a policy of protecting status symbols.
Part II of this Essay provides a brief overview of the status-symbol-protecting elements of trademark law. Part III describes the economics of status signaling. Paretian and wealth-maximization standards of efficiency will be used as measures of economic welfare to avoid the well-known problems of assessing any public policy from a strict utilitarian perspective. The analysis distinguishes between so-called “Veblen effects” and snob effects. Part III concludes that there exists no reasonable argument that the market produces suboptimal levels of status signaling. Part IV considers rights-based arguments for subsidized status signaling. It examines both Rawlsian and Lockean rationales for subsidization of status signaling and concludes that there is no philosophical support for public subsidization of status signaling.
November 2014, Vol. 66, No. 6
Lily Kahng, The Taxation of Intellectual Capital