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Read This Before Purchasing Those “Prado” Sunglasses…

September 21st, 2009 · 16 Comments
Behavioral Econ · Books · Incentives · Policy

Best title I’ve seen in a while: “The Devil Wears (Fake) Prada” (from Marginal Revolution. Also good is the post URL: you-are-what-you-wear.html) The post gives an overview of Dan Ariely‘s experiment regarding counterfeit (or generally fake, imitation, inspired by, whatever) goods and the subsequent behavior by those who consume them. (I’m not sure who Dan pissed off at Wikipedia to warrant a photo that makes him look like Dr. Evil.)

The overall conclusion from the research is that consuming “fakes” makes people more likely to cheat at other tasks that they undertake while interacting with the fake product. This would be a difficult conclusion to reach in the wild because of the correlation versus causation problem. In other words, it’s not enough to observe that people who buy fake items are more likely to cheat since we can’t rule out the possibility that people who would cheat are also more predisposed to by the fake item in the first place. This is where the scientific method is super helpful. (Science: It works, bitches.) In a controlled experiment, the researcher can randomly assign real and fake goods to people and then observe their subsequent behavior. In this setup, any differences in behavior can most likely be attributed to the experimental condition since that is the only difference between the two groups. Ariely does exactly this and shows a causal effect of wearing fake sunglasses:

My favorite part of the video is the visual of Dan in the silk bathrobe wearing the (women’s, I would presume) designer sunglasses. If this is the sort of thing that interests you, you should check out Dan’s book, Predictably Irrational: The Hidden Forces That Shape Our Decisions.

* I’m a big nerd, so I always look at the amazon.com ranks of the books that I link to. I find it interesting that Predictably Irrational‘s revised edition is in fact outselling Greg Mankiw’s Principles textbook.

This video, and New York’s Fashion Week in general, got me thnking yet again about the fashion industry from an economic perspective. One of the most notable features of the industry, at least as far as economists are concerned, is the lack of intellectual property protection for fashion designs. A design house can trademark a particular logo, but it can’t get a copyright or patent on, say, a particular dress design. Until recently, this was (relatively speaking) a non-issue. Designers always had to deal with other companies copying their designs, but it used to be the case that the turnaround time was long enough that the original designer (and her followers) had moved onto something else by the time that the copies came out. (One notable exception to this was ABS by Allen Schwartz, which made a name for itself in part by assembing a design team to essentially start working on ripping off Oscar dresses and the like the minute they were seen on TV. I put this in a slightly different category, however, since the Oscar dresses aren’t usually intended to be mass-produced by the designer herself.)

Let’s fast forward to today and the likes of H&M, Zara and (most egregiously) Forever 21. These companies pride themselves on their supply chain flexibility and efficiency, which allow them to see trends and tweak inventory and product selection to respond. What this also means, however, is that they can get knockoffs on the shelves much quicker than before.

As someone who spends probably more time than I should poring through Vogue, InStyle, etc., I’ve become (unintentionally) very good at spotting knockoffs. And I’ve noticed two things:

  1. It’s not only the “cheap, disposable, trendy clothing” companies I mentioned above that engage in this behavior. Companies like Steve Madden, Bebe, and Nine West have jumped on the “insipred by” (to put it charitably) bandwagon, and even companies like Banana Republic enter the game every once in a while. (For a fun roundup of some examples, see Fashionista.com‘s Adventures in Copyright category.)
  2. It’s not only big, fabulously successful designers being ripped off. This issue also affects a lot of small and mid-size designers, where a few lost sales to a cheaper option could actually mean the difference between success and failure. To make matters worse, these conterfeits usually happen most when a designer comes up with an item that is particularly popular, meaning that, absent of counterfeiting, it could be the “breakthrough design” for the company.

So why is this problematic? The point is that copying the expensive goods allows companies to free-ride off of the original designer’s “R&D” and offer a similar product to the consumer at a much lower price. On the surface, this seems bad for the designer but good for consumers and presumably good for the company doing the knocking off. A lot of people argue that this doesn’t hurt the designer very much since it’s not like the people buying the $20 knockoffs would have purchased the $400 item in the first place. There are even those who try to argue that the counterfeiting is good for the designer because it makes the style more widely available and well-known (or some BS like that). However, there are a number of flaws with this logic:

  • Even if the consumers of the real goods and the consumers of the counterfeit goods are two distinct groups, it is not the case that the designer isn’t losing sales because of the fakes. To put it simply: Would you want to pay $400 for a pair of designer sunglasses if you thought that people were going to be wondering if they were fakes? I didn’t think so. In this way, the mere availability of the counterfeit good lowers the appeal of the real item to many consumers. Here’s an example from CNN Money about exactly this point:

    (FORTUNE Small Business) — A few weeks after clothing label Foley + Corinna debuted its spring 2007 collection, co-founder Anna Corinna received a phone call from one of her store employees.

    A good customer had recently visited the designer’s New York City store and dropped more than $1,200 on four silk dresses for her bridesmaids to wear in her upcoming wedding. Distraught, the bride-to-be said that she had just seen “the same dress” in the window of a discount fashion clothing chain. There, the dress – a polyester replica with identical coloring, cut, and flower design – was selling for $40.

    “She returned the dresses,” says Corinna, 35. “When one of our designs gets knocked off, the dress is cheapened – customers won’t touch it.”

    Knockoffs that sell at a lower price, says Corinna, generate substantial losses for her 25-person company.

    Notice that it’s not the case that the customer was running off to buy the $40 dress instead. (In case you are not aware of how egregious the “ripping-off” can be, you can see pictures of the above example here. For the record, the real one is the one on the left.)

  • If it was good for the designer to have cheaper versions out there, she would have created a diffusion line of some sort and knocked herself off rather than relying on others to do it for her, thank you very much. In practice, you do see this a decent amount, with some designers even going so far as to rip themselves off. But this is their prerogative, not Forever 21’s. (In my opinion at least.)
  • Economic theory teaches us that a socially efficient outcome is one where the market price of an item is equal to its marginal cost. Therefore, in a way, the copycat companies are driving towards what is theoretically a socially efficient outcome. This may be true in the short term, but let’s think about the long-term incentives: Doesn’t it lessen the incentive for designers to come up with new and interesting items if they know that the minute they do their sales and brand are going to be eroded by the multitude of fakes that will soon pop up on the market? (This is the case because the competition will make it more uncertain that they will be able to recoup the fixed costs of their up front investment in design.) As copying becomes more prevalent, we are likely to see less and less original design and more offerings that look like things that came out of the Gap circa 1992. (No offense to the Gap, it just isn’t exactly known for its creativity.) In this way, the counterfeiters may be introducing short-term gains to consumers, but at the expense of long-term losses.
  • As a corollary to the above point, part of the high price on successful fashion items serves to subsidize the designers for the items that don’t sell well. Since the fashion industry is somewhat unique in that it’s really hard to tell what customers are going to like and not like, the original designer is undertaking a risk that the counterfeiters are not, since they are only copying the items that have ex post proven themselves to be popular. Economists would generally agree that it’s efficient to be compensated for taking on risk.

I am not trying to say that the copycat firms are really doing anything wrong, because, given the way the law is currently written, they aren’t. Instead, I argue that it would be socially beneficial in the long-term to change the law. Because of the ability to free ride on the work of other designers, the fashion industry represents a sort of market failure. When markets don’t function efficiently by themselves, the government can improve the situation by stepping in. In other industries, the solution is in the form of intellectual property protection. It looks as though the fashion industry is heading in that direction as well. From April 22:

Today Narciso Rodriguez, Jason Wu, Maria Cornejo, and Thakoon Panichgul spent the day on Capitol Hill with CFDA executive director Steven Kolb, promoting the new and improved Design Piracy Prohibition Act. As in earlier incarnations, the legislation calls for amending the Copyright Act to provide 3 years of protection for registered fashion designs — a modest request compared to the 25 years of design protection available throughout Europe or the 10 years available in countries including Japan and India. Or the life plus 70 years granted to creators working in copyrightable media.

Finally.

P.S. I can almost hear the chants of “but it’s ridiculous to pay $400 for a pair of sunglasses” chants from here. My response? Designing aesthetically pleasing and original clothing items is hard, people. (If you don’t believe me, try it sometimes and see how it goes for ya.) And if it’s hard, it generally takes investment of resources…and resources, especially talented ones, aren’t free.

Tags: Behavioral Econ · Books · Incentives · Policy

16 responses so far ↓

  • 1 Dan L // Sep 21, 2009 at 9:14 pm

    I know how much you love unintended consequences. Being such a big fan of fashion, do you think it would be an easy and straightforward task to determine what constitutes copying and what does not? How is the law worded? As a non-fashion person, I would guess that it would be a nightmare. (Before you respond that other countries already have reasonable standards in place, keep in mind the litigious nature of our great nation.)

    In the past, the rationale for intellectual property rights was to encourage creativity and discovery. At some point it came to be more about what people (er, usually corporations) “deserved.” In this case, you did present the correct argument that the absence of rights discourages fashion designers from innovating. But this needs to be weighed against the argument that the proposed new rights can also discourage certain types of innovation, both by suppressing designs that might run afoul of the new law, and by encouraging successful designers to “rest on their laurels,” so to speak. (I don’t actually have much of an opinion on what the law ought to be.)

    Also, I know that you know the difference, but your post sort of conflates the distinction between counterfeits (ones that actually pretend to be the expensive item) vs copycats (ones that just try to look like the expensive item). Counterfeits typically engage in trademark infringement.

  • 2 Clinton Daniel // Sep 21, 2009 at 9:56 pm

    Like you say, “Science. It works, bitches.” But you’re using anecdotes about knock-offs devaluing genuine goods when it’s hard data that is needed.

    There simply isn’t good evidence that strong intellectual property laws are needed for robust innovation, and the fashion industry is an excellent example of this.

    I don’t think it’s ridiculous to pay $400 for sunglasses, but let’s not pretend that they are $400 due to the cost of “R&D”. Luxury items are priced to make them exclusive, and cheap fakes aren’t.

  • 3 Less Antman // Sep 22, 2009 at 7:20 am

    In the fashion market, the goal of “exclusivity” indeed might benefit from the criminalization of competition, but this is not an argument for its desirability. Moreover, government intervention is not cost-free and we have neither complete information nor incentives for politicians to get it right in this area (the final rules will depend on who has the most money to lobby the right people).

    The enforcement of intellectual monopoly requires massive violations of property rights in tangible assets. Is society really suffering so much from an inadequate number of fashion designs that empowering government to use force in this area is a sensible policy recommendation?

    Behavioral economists spend inadequate amounts of time studying the behavior of government officials.

  • 4 econgirl // Sep 22, 2009 at 1:23 pm

    @ Dan L: If I were to write this again, I would make an explicit distinction between counterfeit and copycat, with the former referring specifically to illegal trademark violation and the latter referring to the, in my opinion sleazy, but not yet illegal business practice of copying designs.

    I see your “resting on the laurels” point, but I don’t think that this is a concern in the fashion industry if for no other reason than people get bored quickly and want new and different shiny things. I also get that it’s not the easiest task to define what constitutes a copy, but other industries seem to have figured it out just fine. Hopefully the threat of litigation would get most companies to behave, or at least not willfully infringe. (From a legal standpoint, willful and accidental infringement have different consquences…I like to think of the former as a “jackass tax.”)

  • 5 econgirl // Sep 22, 2009 at 1:27 pm

    @ Clinton: Sunglasses were actually a terrible example for me to use. Nonetheless, while the $400 isn’t necessarily for R&D, the high price reflects the past investments that the company made in establishing its brand, which also isn’t cheap or easy. That said, branding doesn’t convey social benefits in the way that innovation does, and as such I find it frustrating that the law protects branding but not design.

    Hard data on lost sales is hard to come by, so obviously it’s hard to construct a counterfactual regarding what would have happened if the copycats hadn’t been there. That said, there are some copycats out there that, rather than making a cheap $20 version, make a version for only a little less than the original cost. The fact that these copycats also sell well (which I assert because I see them selling out in stores) is an indication that they are taking away sales, since otherwise the price elasticity of demand would be unreasonably/unrealistically high.

  • 6 Don Gooding // Sep 22, 2009 at 9:11 pm

    “When markets don’t function efficiently by themselves, the government can improve the situation by stepping in. ”

    I second Less Antman’s visceral response to your blind faith in government. Liberals give government that faith; conservatives have no faith; and centrists like me think it MIGHT be possible for government to improve the situation, IF proper incentives for the government folk involved are in place. Behavioral political economy and refereed game theory are areas for much needed research.

  • 7 Less Antman // Sep 22, 2009 at 11:04 pm

    Well, liberals might actually be better at recognizing the danger of restrictions on the use of knowledge than conservatives, and I’ve noticed most conservatives have plenty of faith in the US government as long as it is doing it to foreigners. But neither are consistent statists or consistent libertarians.

  • 8 econgirl // Sep 23, 2009 at 12:55 am

    @ Don: Note my judicious use of the word “can”…

  • 9 Don Gooding // Sep 23, 2009 at 6:34 am

    @econgirl: Glad to see your judiciosity (yeah, I know it’s not a word). Since you’re teaching impressionable young minds (hmmm… Harvard types are already sure about the world) I think you might want to be a little less subtle in presenting the efficacy of government intervention.

    @Less Antman: I was taking issue with the sweeping statement rather than its application to this particular issue. I won’t quibble with your taking issue with my own rather sweeping statement; the attitude of liberals and conservatives towards government is more complicated and issue-dependent. I should have been more clear that I was specifying the issue of market intervention.

  • 10 econgirl // Sep 23, 2009 at 11:32 am

    @ Don: You will appreciate the following:

    http://www.economistsdoitwithmodels.com/2009/03/13/the-ten-principles-of-economics-by-the-stand-up-economist/

    The part in the middle goes through a relevant bit: “if you have the choice between saying ‘can’ and saying ‘will’, ‘will’ is clearly superior…therefore, if you are saying that government intervention ‘can’ make everyone better off, it must be because you can’t say that government intervention ‘will’ make everyone better off…” etc.

  • 11 Less Antman // Sep 23, 2009 at 3:51 pm

    @ econgirl & Don

    Fair enough: I probably need to allow more for the casual nature of blog discussions. Having to add disclaimers and qualifications to every post can make it impossible to say anything.

    On the other hand, substituting “may or may not” for the word “can” does change the feel of a sentence, even if it doesn’t change the technical meaning. Just a thought.

  • 12 Zac Gochenour // Sep 23, 2009 at 4:17 pm

    What constitutes a copy? Who should determine this? Government bureaucrats? The argument that “other countries” have this figured out is more than underwhelming. The classic flaw of an economist is to point out (what they believe to be) a market failure, assume a government solution, and move on.

    A side note about the “long term incentives” – answer honestly – is that the success of brands like Louis Vuitton is due to their investment in “R&D” or their investment in marketing? If the idea Jodi is promoting here become reality, I think it their success will be highly correlated with their investment in.. lobbyists.

    http://en.wikipedia.org/wiki/Rent-seeking

  • 13 econgirl // Sep 23, 2009 at 4:27 pm

    @ Zac: I think that LV invested in marketing its trademark and brand, since that is what is legally protected. Maybe if the designs themselves were protected we would see more innovation from LV and fewer identical looking logo-embossed bags. That’s kind of my point.

    In the US, we currently have a process for writing patents, approving patents and evaluating them for infringement. There is nothing from a legal standpoint that makes fashion different here. Furthermore, it’s hard to tell what constitutes a copy for books, music, fabric (which is in fact protected, strangely enough) and lots of other things, yet that is not used as an excuse for lack of intellectual property rights in general.

  • 14 Less Antman // Sep 23, 2009 at 5:05 pm

    Plenty of economists are questioning the usefulness of patents, and the drug industry is a prime example of a place where innovation has been slowed dramatically by the need to get approvals and licenses for all kinds of research. Copyright threatens to destroy the Internet.

    Washington University economists Michele Boldrin & David K. Levine have a thought provoking book entitled Against Intellectual Monopoly that is available (without copyright protection!) at http://levine.sscnet.ucla.edu/general/intellectual/against.htm

    Of course, now this topic has REALLY gotten too big for a blog post.

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