The Role of Intellectual Property in Protecting Reputation

Today in class, we went over a paper called The Value of a Reputation System by John Kennes and Aaron Schiff (both of The University of Auckland). The paper presents a complicated mathematical model of markets that are similar to eBay and other auction sites, although the example in the paper is "pick-your-own" orchards.

I've also been reading Peter Navarro's book The Coming China Wars recently and the two ideas got me thinking about the value of intellectual property in properly functioning markets.

In Keenes and Schiff's paper, they model markets where there are product with high and low quality and vendors who are willing to lie via false advertising attract buyers to their low quality products. They show how in markets with enough sellers, a reputation system (even a simple one) can add "social value" by protecting buyers from low quality products.

In Navarro's book, he has a chapter on the counterfeiting culture that is rampant in China. In the IT industry we tend to focus on software and music and music, but, the problem extends to hard goods as well. For example, there are Chinese manufactured, counterfeit drugs that have no active ingredient and may even be toxic, yet the packaging is so good--right down to the holograms--that not even the legitimate manufacturers can tell them from their own product without lab tests.

This fits quite well in the model that Keenes and Schiff created: high and low quality products and a good number of buyers. Buyers would be protected from this fraud except for one thing: Keenes and Schiff assume that sellers can be identified. Counterfeiting is an identity problem. Brands are identifiers and trademarks are protections for those identities.

Counterfeiting is just identity theft at the corporate level and the consequences, in many cases, affect more than victim because anyone who relies on that identity in making purchasing decisions is at risk.

So the conclusion isn't anything that should be shocking or surprising: good, secure, universal identity systems are a foundational element in creating social good--online and off.