Reputations, brand names and advertising

2.53 Reputations are one means of signaling competence and credibility. The reputation of an individual (or firm) will incorporate perceptions about the quality of the goods/services he offers, the trustworthiness of his words and actions, his competence, and various other real or mythical aspects of his character and behavior (Casson (1982)). 'Good' reputations reduce the costs of arms-length trade as buyers and sellers will have greater confidence in one another, permitting them to lower their initial screening efforts and subsequent monitoring of product quality. In contrast, when a firm or individual has a 'bad name', this is a signal to other parties either to pass up potential trades or else to closely monitor product quality, ask for prepayment for goods, and employ other defensive techniques. Reputations, both good and bad, provide a proxy for a large amount of information which may not be readily available to potential trading partners. A 'good' reputation may facilitate entry into new markets and can spillover onto other goods and services which its bearer may provide.

2.54 One means of facilitating this spillover of reputation effects is to develop and promote a brand name, either for a company or a country. Where the link between producers and ultimate consumers is weak or nonexistent, the reputation of the seller and his brand name may serve as an effective proxy for quality. The brand name establishes responsibility for the product, thus increasing the scope for compensation should quality be substandard (Demsetz (1964). Branding not only helps in the introduction of new products, but helps to forestall consumer substitution of the product with cheaper items. Advertising is another direct means of providing information to buyers and consumers and of persuading them of the merits of generic or branded products. Advertising can support the growth of firms and of markets and therefore contribute to the realization of economies of scale.