Strengthening trademark protection is net negative for innovation and product quality

In surveys conducted by the NSF and Census Bureau, both private and public firms rate trademarks as their most important intellectual property assets, ahead of trade secrets, copyrights, and patents (Jankowski 2012). This paper uses the 1996 Federal Trademark Dilution Act to examine the effects of trademark protection on firms' profits and strategy. We document that treated firms' operating profits increased sharply after the FTDA's passage, and fell back after its key provision was nullified by a Supreme Court decision. The value of added trademark protection was localized in industries that had high advertising expenditures, selling expenditures, and trademark holdings ex ante. More affected product markets had sharply lower entry and exit post-FTDA, consistent with a mechanism whereby the FTDA raised entry costs for potential entrants into affected product markets. Treatment effects were strongest in firms that faced moderate entry threat ex ante, consistent with strategic entry deterrence by the incumbent firms.

Guided by theory, we investigate the effects of strengthening trademark protection on firm strategy. Treated firms reduced product quality as measured by increased incidence and value of product recalls, and curtailed innovation by reducing R&D spending, patenting, and new product announcements. While these observations are broadly consistent with a quiet life or rent extraction hypothesis, we also find that treated firms introduced new products into previously unexplored markets by extending their brands into all-new goods and service classes. Taken together, these observations suggest that stronger trademark protection led firms to pursue exploitative rather than exploratory innovation and product market strategies.

It is important to acknowledge that our results show the effects of the treatment on the treated, that is, the effects of granting additional antidilution protection to incumbent firms in a strong IP enforcement regime. This episode is useful to understand how strengthening the protection of famous trademarks affected firm and industry dynamics. An open question is whether these effects dominate in the long run, and whether there are benefits to strengthening trademark protection for smaller firms and startups or in environments of weak IP enforcement. The comprehensive USPTO trademarks data can contribute to further research on these topics, as well as new research on product market dynamics and intangible capital.

We believe these results are an important first step, by demonstrating that firms' profits and strategy are strongly affected by changes in trademark protection at the margin. Our findings that the FTDA was followed by lower product quality and innovation add to recent studies on the potential downside of intellectual property protection (Boldrin and Levine 2002; Williams 2013; Moser 2013), and suggest that strengthening trademark protection may not deliver what is promised on the label.