Cato Institute Analysis: Why People Trust Brand Names (SUMMARY)
November 1, 1997
If a consumer has sampled only one or two products of a large, brand-name company and found them rewarding, he is likely to buy others with some degree of confidence. That company has earned that buyer's trust, points out Santa Clara University economist Daniel B. Klein.
Klein argues that the free market has developed a vast array of institutions and practices to supply information to consumers and win their confidence. For example:
- Franchising companies demand maintenance of a certain level of performance and standards by their franchisees -- often hiring anonymous inspectors -- lest the parent company's name become tarnished due to a few bad experiences by consumers.
- Successful companies build trust by guaranteeing a refund if a product happens to prove defective or is not to a consumer's liking.
- Second parties, such as Underwriters Laboratories, are hired to test and inspect products -- and then grant a publicly-trusted seal for use by the manufacturer.
- Companies hire trusted services to rate their securities -- thereby providing valuable information to potential investors.
Critics of advertising often fail to appreciate its role in imparting information to consumers, says Klein. Through advertising, a producer in effect makes a promise to a potential consumer. Fulfilling that promise depends to a great extent on the producer's investing in expensive quality-control systems.
Source: Daniel B. Klein, "How Markets Produce Trust," Cato Policy Report, November/December 1997; Cato Institute, 1000 Massachusetts Ave., N.W., Washington, D.C. 20001, (202) 842-0200.
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