The Value of Brands to Society Part 1 of 4

The following series is an excerpt about brands from the book Basic Economicsby Thomas Sowell:

Brand names are often thought to be just ways of being able to charge a higher price for the same product by persuading people through advertising that there is a quality difference, when in fact there is no such difference. In other words, brand names are considered to be useless things from the standpoint of the consumers interests. As India’s Prime Minister Nehru once asked, “Why do we need nineteen brands of toothpaste?"

In reality, brand names serve a number of purposes from the standpoint of the consumer. Brands are a way of economizing on scarce knowledge, and of forcing producers to compete in quality and price.

When you drive into a town you have never seen before and want to get some gasoline for your car or to eat a hamburger, you have no direct way of knowing what is in the gasoline that some stranger at the filling station is putting into your tank or what is in the hamburger that another stranger is cooking for you to eat at a roadside stand that you have never seen before. But, if the filling station's sign says Chevron and the restaurants sign says McDonald's, then you don’t worry about it. At worst, if something terrible happens, you can sue a multi-billion-dollar corporation. You know it, the corporation knows it, and the local dealer knows it. That is what reduces the likelihood that something terrible will happen. On the other hand, imagine if you pull into a no-name filling station in some little town and the stranger there puts something into your tank that messes up your engine or-worse yet-if you eat a no-name hamburger that sends you to the hospital. Your chances of suing the local business owner successfully (perhaps before a jury of his friends and neighbors) may be considerably less. Moreover, even if you should win, the chances of collecting enough money to compensate you for all the trouble you have been put through is more remote.

Brand names are not guarantees. But they do reduce the range of uncertainty. If a hotel sign says Hyatt Regency, chances are you will not have to worry about whether the bed sheets in your room were changed since the last person slept there. If the camera you buy is a Nikon, it is unlikely to jam up the first time you wind the film. Even if you stop at a dingy and run-down little store in a strange town, you are not afraid to drink a soda they sell you, if it is a bottle or can of Coca Cola or Seven-Up. Imagine, however, if the owner of this unsavory little place mixed you a soda at his own soda fountain. Would you have the same confidence in drinking it?