Cato Institute Analysis: Why People Trust Brand Names (SUMMARY)
January 1, 1998
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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