Introduction

Competition law has an ambivalent relationship with branding. On the one hand, competition law sometimes sees brand differentiation as positive for competition insofar as it makes collusion more difficult, and even goes out of its way to facilitate branding, for example by encouraging vertical restraints that facilitate brand promotion. On the other hand, competition law sometimes sees branding as a threat to market competitiveness, for example when it creates entry barriers or permits firms unilaterally to price above competitive levels.

In this chapter I introduce three challenges that characterize this ambivalent relationship. First, competition law must account for the fact that branding can sometimes diminish competition and enhance market power by creating space between rival products, but can also intensify competition by incentivizing producers and retailers to invest more heavily in product quality. Second, antitrust law – which generally assumes the sovereignty of consumer choice – has struggled with the possibility that excessive branding can create artificial distinctions in the minds of consumers and shift demand curves outward in ways that do not correlate with actual gains to consumers. Accepting this premise places in jeopardy the underlying consumer sovereignty assumption of antitrust law. Finally, competition law has to decide whether to deal with the phenomenon of post-contract lock-in to a particular brand. Is the power that comes from a consumer becoming technologically or contractually bound to a supplier the kind of market power with which competition law is rightly concerned?

Product differentiation and market power

Academic insights on the relationship between brands and market power go back to at least the 1930s and work on monopolistic competition and product differentiation by the British economist Edward Chamberlin. Chamberlin was part of the coterie of mid-twentieth-century economists who responded to “ruinous competition” claims made by classical economists of the previous generation such as Alfred Marshall and Arthur Twining Hadley. The marginalists had argued that competition tended to force firms to price at marginal cost, which in turn prevented them from covering their sunk and fixed costs and thus invariably led to financial ruin in the long run.