Multi-brand Firms and Brand Acquisition: The Impact of Trade Liberalization on Reallocation of Brand Equity

Abstract

Recent economic research on the effect of trade liberalization has focused on the firm-level reallocation of resources induced by free trade. The studies have developed theoretical models of multi-product firms and shown that trade liberalization induces resource reallocation across firms and within firms. However, these studies have only investigated the transfer of tangible resources, such as labor or capital. Only scarce attention has been paid to the transfer of intangible resources. This paper, however, analyzes the reallocation of brand equity between firms by introducing the possibility of brand acquisition. To analyze the effect of trade liberalization on brand acquisition in a general equilibrium setup, I extend the within-brand cannibalization model of Agur (2010) and Dhingra (2013). In the presence of the within-brand cannibalization effect, consumers consider products to be more substitutable within brands than across brands. Therefore, when a firm introduces a new product variety, the demand for its original varieties falls more than the demand for the varieties of other brands. Under this effect, productive firms cannot increase their scope sufficiently. Through the acquisition of an existing brand, however, productive firms can expand their production without profit loss from within-brand cannibalization. In this model, acquisition can be used as another decision variable of expanding production. Market expansion through international trade strengthens the incentive for more productive firms to acquire brand equity of less productive firms as it raises the surplus from brand acquisition for more productive ones. That is, trade liberalization will reallocate market shares from less productive to more productive firms

then the more productive firms will expand their production by purchasing other firms brands. Meanwhile the least productive firms will exit by selling their firms in the face of increased market competition. In the empirical section of this paper, the main predictions of the theoretical model using USPTO Trademark Dataset are tested. Trademark data is suitable for the empirical test of brand acquisition, since trademark identifies and distinguishes the source of the goods of one party from those of others, and all associated trademarks are transferred when a brand is sold. This study provides a broad picture of trademark assignment activities, and shows how trade liberalization led to the reallocation of brand equity among firms during 1979-2000.