Why knock-offs are good for fashion

Just sent my way by the missus, from Boing Boing. The original piece appears in the New Yorker:

The Piracy Paradox

The paradox stems from the basic dilemma that underpins the economics of fashion: for the industry to keep growing, customers must like this year’s designs, but they must also become dissatisfied with them, so that they’ll buy next year’s. Many other consumer businesses face a similar problem, but fashion—unlike, say, the technology industry—can’t rely on improvements in power and performance to make old products obsolete. Raustiala and Sprigman argue persuasively that, in fashion, it’s copying that serves this function, bringing about what they call “induced obsolescence.” Copying enables designs and styles to move quickly from early adopters to the masses. And since no one cool wants to keep wearing something after everybody else is wearing it, the copying of designs helps fuel the incessant demand for something new.

The situation is not necessarily easy on designers, who have to keep coming up with new ideas rather than being able to milk a trend for years. But it means that in the industry as a whole there is more innovation, more competition, and probably more sales than there otherwise would be. And the absence of copyrights and patents also creates a more fertile ground for that innovation, since designers are able to take other people’s ideas in new directions. Had the designers who came up with the pinstripe or the stiletto heel been able to bar others from using their creations, there would have been less innovation in fashion, not more.

In fact, the article is wrong on both counts: (i) it is not piracy, because designs are not copy-protected (meaning they cannot be stolen, or pirated); and (ii) it is not a paradox. In fact, the industry of high-end fashion follows basic economic principles more closely than a lot of other industries, both in how clearly the rules are applied, and how basic the principles are (some industries need more work to show those principles in action).

First, the appeal of ‘fashion’, as we can define the good, consists of many things. The important characteristic, however, we shall call exclusivity. Yes, various other characteristics go (for want of a better term) in, and out, of fashion, but the appeal of something new, even if it is hideous (full disclosure – I am not very fashionable, but I am judgemental), is that it is new; it is exclusive.

Secondly, Fashion as a market is more-or-less monopolistically competitive: it has many sellers, slightly differentiated products, and very few barriers to entry. It is easy to co-opt and reproduce a couture design (and why French? I vote we rotate – this year we translate unnecessarily fancy terms into Hungarian. Next year, Inuit), and cheap to pour that product into the market. The ‘new’ in the fashion good is very quickly idenfied and commodified.

The difference between monopolistic competition and perfect competition is the product. Both have many sellers and few barriers to entry but, in the latter case, goods are identical and competition is according to price. In monopolistically competitive markets, sellers have some market power due to product differentiation, some brand loyalty, some ability to extract rents (sorry, make a profit).

In the long run, however, monopolistic firms lose that power: competitors muscle-in on their differentiation, because barriers to entry are few and there are profits to be made (i.e. ripping off high-end labels and their latest daft handbags). The only way for monopolistically competitive firms to continue to make profits in the long run is by continuously differentiating their products. I.e., carving the long run up into sequential short runs – exactly what fashion does. By continuously differentiating, everyone from Louis Vutton to Apple to the Gap to Vidal Sassoon ensures their market power remains at least as strong (in the face, remember, of competitors doing the same). Every Winter season, every Summer season, is a new monopolistically competitive market.

Fashion is actually a very rational, very simple market (remember the rule: you only need to establish what is rational in the market: you do not have to agree that such behaviour is rational yourself. Suicide-bombing is rational to the people who do it, whether we like it or not).

The New Yorker piece, and the Boing Boing companion, both accurately discuss the subsequent nonsense of cries for copyright protection – erecting barriers to entry. This would have the effect of securing market power for monopolistically competitive firms, but at a cost to consumers, and this is an interesting comparison. The Boing Boing article discusses database copyright comparisons between the US (none) and the EU (lots), and the fact that the market is stagnant in Europe, booming in the US. This is good for users of such technology.

The question, then, is this: is the same true for fashion? Is it really a good thing for us to be wearing cheap crap that poisons Mexican rivers, only to replace it in 6 months? Would design copyrights of high-end fashion, and even the Banana Republic’s fashion, really make any difference? Is there that much variation in design out there (consider how close you might be allowed to come before being sued by Tommy bloody Hilfiger, for example)? Would a fashion aristocracy re-establish itself?

I think I’ll put this one to my students, when we cover market models next week…

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