PAKISTAN’S accession to the Madrid system — a global system for facilitating the registration of trademarks — has been on the table for almost a decade now.

If anything, the accession would be good news for the economy. The Madrid system, controlled by the World Intellectual Property Organisation (WIPO), has proven to be an effective instrument in stimulating global trade for one simple reason: the incentive structure.

The Madrid system has expanded the incentive structure of trademarks on a global level by establishing an international bureau for the international registration of trademarks, increasing the stakes of businesses operating transnationally.

Whatever a company may be physically worth to its members, its effective value, ie its goodwill, packaged as its trademark, is a hostage to the consumer. From a purely economic standpoint, trademarks facilitate efficient market transactions by inversely affecting two specific types of costs: reputational and information.

The effect of a centralised authority makes it logistically easier to manage the protection of trademarks by reducing the steps involved in simultaneous registrations in various states

In a typical market transaction involving a buyer and a seller, one of the most crucial components is trust, which is dependent on the information that each party to the transaction has regarding the other party.

Where the market participants are not repeat players, there is room for information asymmetry, ie the consumer would have imperfect knowledge about the buyer, increasing the chances of inefficient allocation of resources unless the consumer bears additional costs to gather more information about the seller.

As an alternative to expending costs, a trademark is used as a device to convey that information about the seller.

In market transactions consisting of repeat players, trademarks function as indicators of quality encompassing the reputation of a firm, increasing the stakes of the sellers in the reputation associated with their brand and increasing the cost of negligence for the seller.

While the merits of the trademark framework have blessed the investment environment, there is much to be gained. The benefits of the trademark system can multiply tenfold under the Madrid system for predominantly two reasons: the economic benefits of a multilateral treaty, and the organisational benefit of WIPO and the bureau established for the international registration of trademarks.

Though potentially oversimplified, the rationale behind treaties is informed by the same rationale behind contracting. Assuming an effective enforcement mechanism, people enter into contracts in order to make mutual gains to trade. Similarly, when states enter into treaties, they do so in order to reach an agreement which works for their collective benefit.

The Madrid system has developed a scheme to realise these collective benefits. The most prominent benefit, however, is the gain from coordination. Where states act as rational actors in their interactions with other states, there are two main problems: the rational decisions make both parties worse off, and the costs of interacting are high due to the collective action problem.

In cases where states are looking only to maximise their benefit from a transaction, there is a chance that the eventual outcome of any activity would not be the optimal solution and losses could have been avoided had the parties cooperated.

In strategic sciences, this situation is known as the prisoner’s dilemma. Treaties, including the Madrid system, force member states to cooperate by dictating the response to any action, beating the prisoner’s dilemma for realising gains from cooperation.

Similarly, where any activity requires action on part of a group of states, the probability that certain states would try to hold out in order to leverage their consent increases the cost of a collective action.

The inherent purpose of multilateral treaties like the Madrid system is to reduce the collective action costs by restricting a state’s choice of holding out. This makes bargaining within the system straightforward. For example, Article 5 of the Madrid system prevents national trademark offices from refusing the registration of a trademark filed through the bureau unless refusal is on the grounds factored within the treaty.

In addition to the economic benefits of a multilateral treaty, a centralised registration mechanism like that of the bureau has institutional advantages.

The international registration through the bureau creates a parcel of national registrations for the trademarks. The effect of a centralised authority makes it logistically easier to manage the protection of trademarks by reducing the steps involved in simultaneous registrations in various states.

The combination of a formal arrangement for cooperation between states facilitated through an organisation for realising the benefits of trademarks has the obvious advantage of reducing the costs associated with spot-market transactions.

Moreover, it creates a win-win situation for investors looking at Pakistan as a potential market and Pakistani investors seeking to expand their base internationally.

samar.masood2@gmail.com

Published in Dawn, The Business and Finance Weekly, May 21st, 2018