The Fashion Lottery: Cooperative Innovation in Stochastic Markets

Abstract:     
The fashion market is an anomaly: innovation is vigorous but original producers are substantially unprotected against imitation, which proliferates under an incomplete property regime consisting of strong trademark protections and weak design protections. We account for this anomaly through a "cooperative innovation" model where producers prefer an incomplete property regime that permits some imitation to alternative regimes that permit no imitation or all imitation, independent of budget constraints. A property regime that permits positive but limited levels of imitation operates as a form of group insurance that alleviates the risk of recoupment failure in a market characterized by demand uncertainty, long lead times, skewed returns and rapid product obsolescence. This risk-based model is compatible with producers' selective enforcement of intellectual-property protections, privately-administered quasi-copyright schemes, and institutional mechanisms that facilitate seasonal coordination of design outcomes. This model potentially generalizes to other markets that operate under demand uncertainty and other aggravating conditions.

Keywords: Innovation, Intellectual Property, Fashion, Apparel, Imitation, Cooperation, Coordination, Insurance, Demand Uncertainty

Working Paper Series