Trademarks are an important source of information in our economy. They identify the products offered by a particular seller and permit the buyer to associate advertising or past experience with an item currently for sale. This lowers buyer search cost and creates an incentive for sellers to produce high quality products [10; 3]. When products have trademark protection, however, buyer experience may tend to create a barrier to entry that results in prices greater than marginal cost and supranormal profits for the first entrants into the market [9]. Concern about excess profits has led to recent proposals to require the compulsory licensing of trademarks. These proposals would require sellers of leading brands to freely license their trademarks to any firm producing a product of the same quality and characteristics. Recent court cases involving both ReaLemon and ready-to-eat cereals sought relief through compulsory licensing of the trademark [7; 8]. The argument in both cases was that licensing would create more competition, enhancing consumer welfare, since price would be closer to marginal production cost. Scherer argues that the benefits of compulsory licensing would be "lower prices and reduced outlays on promotion."' Besides trademarks, the other area in which compulsory licensing arises is in the case of patents. In Canada, between 1969 and 1984 over 300 compulsory licenses were issued for over 70 major drugs and the results were dramatic: when Valium was selling in the U.S. for $186 per thousand tablets wholesale, the same amount of a licensed "generic" copy of that tranquilizer was available in Canada for less than $2. Might similar results be achievable from licensing trademarks to lemon juice or bleach, and if so, would these results represent an improvement in welfare? It is well known in the literature on patents that removing the monopoly power of the patent holder though lowering prices in the short run, will also create perverse incentives for research and development in the long run that may more than wipe out the short run advantages of lower prices. It has not been acknowledged, however, that a similar tradeoff arises in the case of trademarks.