Download Read the text and complete the tasks that follow. BRAND NAMES 1

Read the text and complete the tasks that follow.
BRAND NAMES
1 Consumers have incomplete information about product availability, quality, and alternative
prices. This leads them to rely on brand names, which lessen the costs of acquiring product
information. By relying on brand names and the reputations associated with them, consumers
can make reasonable purchases without much research.
2 Many economists do not like the fact that consumers put so much reliance on brand names.
The problem, as these economists see it, is that this consumer reliance gives companies with
established brand names "market power" over prices. When companies "differentiate" their
products, they can charge more than others for what these economists claim are "truly"
identical products.
3 However, today more and more economists advocate brand names. Consumers are not fully
informed and know it. Therefore, they value company reputations and are willing to pay more
for their products. They are not acting irrationally, in fact, they are simply protecting
themselves without devoting huge amounts of time to research each company's product.
Reputations, and their brand names, are an efficient source of information for consumers.
4 Because of consumer reliance on reputations, companies have incentives to establish their
reputations by maintaining and improving their products. This incentive would be lost if a law
came about to enforce the selling of indistinguishable, homogeneous products. If consumers
could not identify the companies that produced the products they bought, individual
companies would have no incentive to improve the quality of their products.
5 The repeat-purchase mechanism, where good past performance and a good reputation are
rewarded with future profitable sales, provides companies with the incentive to perform in the
marketplace. As a result, companies with superior reputations, representing good past
performance and the likelihood of future profitable sales, have something to lose if they
perform poorly. Perrier (a manufacturer of bottled water) is a good example of what cost can
be imposed. In 1990, it was discovered that the benzene used to clean Perrier’s bottling
machinery had contaminated some of its product. As a result, Perrier experienced a
significant decrease in demand and had to spend large amounts of money on increased
advertising, free samples, and other marketing and promotional expenditures in an attempt to
recover its market share.
6 Because companies with valuable brand names that fail to perform have more to lose than
small marginal companies without valuable brand names, consumers who buy brand name
products are necessarily paying for something. They are buying the added assurance that the
brand name company will have an increased incentive to take the necessary measures to
protect its reputation for quality.
7 What about more standardized products such as aspirin which contain the same basic
ingredient? If consumers are not ignorant or irrational, why would they buy a brand name
here? The answer is that not all aspirin is exactly the same or chemically equivalent. More
importantly, the higher-priced brand and the lower-priced "nonbrand" aspirins are not
economically equivalent. In fact, to producers and consumers the products are necessarily
different. As the Perrier example vividly illustrates, even for a "simple" product, something
can go wrong. Because of the existence of a valuable brand name, the company selling the
brand name aspirin has more to lose if something does go wrong. The company, therefore,
has a greater economic incentive to take precautions. This added quality assurance is one of
the things brand name consumers knowingly pay for.
8 So the real question becomes whether consumers are paying too much for this quality
assurance. All consumers pay something for brand name assurance; it is merely the amount
that consumers pay that varies across products. Even people who say "all aspirin is alike"
spend some money on brand name assurance. They do not buy "nonbrand" aspirin off the
back of a pickup truck at a swap meet. Instead, they may buy "lower" brand name aspirin,
such as aspirin carrying the brand of a chain drugstore. Further, it is significant that
consumers buy a much smaller share of such "lower" brand name aspirin in the children's
aspirin segment of the market than in the adult segment. Many people decide, as evidenced by
their behavior, that although they are willing to purchase less brand name assurance for
themselves, they want the higher-quality assurance for their children.
9 There is one more reason why people need brand names. They operate in marketplaces
where the government sets product quality standards. They are necessary because
government standards often cannot easily capture some elements of performance. For
example, although the government may grade agricultural commodities like vegetables, for
color, size etc, they cannot define and grade characteristics such as taste that are important
to consumers. Also, government agencies that rate and assure quality are not perfect. For
example, in 1989 the Food and Drug Administration found several generic drug companies
had faked or altered test results submitted to the FDA to get their drugs approved and that
three FDA employees admitted accepting gifts from these generic companies. Therefore, to
assure the quality of the products they buy, consumers are right to rely not just on
government standards, but also on brand names.
http://www.econlib.org/LIBRARY/Enc/BrandNames.html
1. Match the main ideas below with the paragraphs in the text. Write the paragraph
number in the space given.
_____ Many economists believe that consumers are willing to pay more for brands in order to
save time.
_____ Some people buy lower brand name aspirin for their selves but they prefer bigger brand
names for their children because they want higher quality assurance for them.
_____ Consumers are paying extra because they believe that these companies will take the
necessary measures to protect their reputations for quality.
_____ Brand names are an alternative to government product quality standards which can not
always be trusted.
_____ Consumer reliance on brands gives companies market power which leads to the
overpricing of goods.
__1___ Brand names lessen cost and research time.
_____ If companies want to continue to earn profits, they have to live up to their past
performances and good reputations.
_____ Customers are willing to pay more for certain drugs because they believe that the
company with a brand name has more to lose if something goes wrong.
_____ Brand names drive companies to maintain and improve their products because of their
consumer’s reliance on reputations
2. Circle the correct answer according to the text.
1. What do customers not do? (paragraph 3)
a. Pay more for the products
b. Research the products
c. Protect themselves
d. Value the company reputations
2. What is Perrier a good example of? (paragraph 5)
a. A positive effect of the repeat-purchase mechanism
b. A negative effect of the repeat-purchase mechanism
c. How the cost can quickly get out of control
d. How demand can result in a contaminated product
3. What can make a difference with choosing standardized products? (paragraph 7)
a. That the brands are not economically equivalent
b. That the brands are not chemically equivalent
c. That some brand has more to lose than the customer
d. That a well-known brand assures the quality
4. What else affects the sales of aspirin? (paragraph 8)
a. The name of the chain drugstore
b. The price of the well-known brand
c. The age of the user of the product
d. The behavior of the parents
5. What is one thing that the government can’t do? (paragraph 9)
a. Set clear product standards
b. Report on test results
c. Give things to the FDA
d. Evaluate levels of taste
Key
1.
1) Par. 3
5) Par. 2
9) Par. 4
2) Par. 8
6) Par. 1
2.
1) b
2) b
3) d
4) d
5) a
3) Par. 6
7) Par. 5
4) Par. 9
8) Par. 7