MPI Munich Trade Dress and Product Differentiation Trademarks as Instruments of Monopolistic Competition Workshop on « Economic Analysis of Trade Marks and Brands » 5 th and 6 th June 2008 at OHIM in Alicante

Competing Monopolistically Firms: Target some distinct consumer group Differentiate their products to match consumer preferences In order to: Exercise control over price proportional to the demand elasticity of the target group Be able to ignore price and production decisions of competitors to a certain extent Each firm becomes a monopolist with regard to the consumers that prefer its product

Trademarks and (Monopolistic) Competition Conventional wisdom about the role of trademarks in the marketplace: Consumer search cost minimization Product responsibility - Avoidance of the adverse selection problem Communication function? Trademarks as Instruments of Monopolistic Competition Non-conventional trademarks – Especially Trade Dress Protecting methods of product differentiation In the background of trademark litigation there is often a non-reputation related interest

The Effectiveness of Monopolistic Competition I Chamberlin (1933): Unexploited Economies of Scale Core assumptions of the Chamberlinian model: Large group of independent producers each selling a differentiated version of a specific commodity Consumer preferences are symmetrically distributed among the various products Free entry

The Effectiveness of Monopolistic Competition I In the long run: New entrants taking customers symmetrically from each incumbent would drive economic profits to zero level Firms market share is not large enough to allow for advantages related to economies of scale (excess capacity theorem) Result: Conflict between product diversity and productive efficiency Product variety is considered to be optimal when it does not lead to unexhausted economies of scale

The Effectiveness of Monopolistic Competition II Un-exhausted economies of scale are trumped by consumer utility derived from product variety Social Optimum reflects a decision of the consumer on the number of available products and the quantity of each brand

The Effectiveness of Monopolistic Competition II The degree of product variety would usually be suboptimal: There would always be either too much variety because firms would tend to differentiate intensively in the advent of monopoly profits or Too little variety because high fixed costs of entry keep the number of firms at a low level Result: Monopolistic Competition is effective in a dynamic way, since it provides firms with incentive to satisfy diverse consumer needs

Product Variety and the Market Mechanism Hotelling: The principle of Minimum Product Differentiation Will firms disperse in anticipation of monopoly profits Or will they prefer the conformity of imitation? Could Trademarks be conceived as instruments of facilitating dynamic competition with differentiated products?

The Relevance of the Niche Market Concept Evolutionary Economics: Surviving in the marketplace creating niches Working with distinct consumer groups immunizes firms from price undercutting of bigger competitors Antitrust case law and theories of unfair competition that consider such price undercutting as anticompetitive A Schumpeter type argument: Monopoly profits arising out of market niches could be utilized for emergence of new differentiated products Trademarks as mobility barriers

Current Trademark Doctrine ECJ seems sceptical towards non- conventional trademarks Case Law: Coronita, Storck, The Washing Tablets Cases

Current Trademark Doctrine Concerns over product monopolies expressed in trademark parlance Distinctiveness denied I: Consumers not accustomed to view trade dress as indication of origin Distinctiveness denied II: combinations of basic shapes and colours Trademark protection only for signs that depart significantly from the norm Furthermore, the sign at issue should also be distinctive at the time of registration USA: Secondary meaning requirement

Possible to Integrate Competition Concerns into Trademark Norms? Trademarks as Part of Competition Law Balancing interests of consumers, competitors and the public interest on the maintenance of a competitive market structure in trademark litigation Trademark Law and Social Norms: Reactive to consumer expectations vs. Shaping social norms

And a Word of Caution: Possible Anticompetitive Effects Restriction of Localized Competition Control of submarkets through trade dress claims

And a Word of Caution: Current functionality doctrine seems not to take account of this problem Functionality is either mechanical or Aesthetic denying protection in extreme cases (e.g. spare parts)