Shopping for Gucci on Canal Street: Reflections on Status Consumption, Intellectual Property and the Incentive Thesis
43 Pages Posted: 23 Apr 2005
The standard incentive rationale for intellectual property rights assumes that unauthorized imitation necessarily reduces innovation incentives by depriving the innovator of sales it would otherwise enjoy in the absence of such imitation. This thesis falsely predicts that the fashion industry, which has few meaningful forms of legal protection and is consequently exposed to widespread counterfeiting, would suffer from low investment in the development and production of new items. This anomalous result may be accounted for by a proposed mechanism whereby counterfeiting (provided it is visibly imperfect, the typical case in the fashion industry) is likely to increase innovators' expected profits in markets where (among other things) demand is driven in substantial part by the status benefits that accrue to visible consumers of the relevant item. This claim relies on an economic approach to intellectual property rights that unusually takes into account the cyclical and interdependent consumption patterns peculiar to fashion or status goods markets. Imperfect counterfeiting and the resulting dissemination of inferior copies may increase the expected profits of legitimate producers by inflating the premium that trend-setting consumers are willing to pay in order to acquire what is now labeled as the authentic good, and by advertising and even exaggerating the popularity of the original good (in addition to its imitations) among trend-following consumers. Legitimate producers cannot easily replicate these results by directly introducing inferior versions of the relevant fashion item because doing so risks seriously damaging a producer's brand capital in the long term. Given the foregoing, counterfeiting should not always be expected to depress innovation incentives, thereby accounting for the apparently anomalous state of affairs in the fashion industry where high levels of legitimate production coexist with high levels of unauthorized imitation. As a normative matter, while this proposition apparently counsels against allocating significant social resources to the enforcement of anti-counterfeiting statutes, it remains undetermined whether tolerating positive levels of imperfect counterfeiting is the preferred policy option given that fashion goods purchases are at least partially motivated by a mutually defeating (and therefore, socially wasteful) race among consumers to acquire or defend positions on the social ladder. Even if the standard incentive thesis cannot justify a significant investment by the state in detecting and prosecuting imperfect counterfeiters, such investment may be socially beneficial to the extent that it increases the cost of acquiring counterfeit fashion goods and therefore limits socially wasteful expenditures on such goods.
Keywords: Intellectual property, status goods, fashion goods
JEL Classification: K11
Suggested Citation: Suggested Citation