Katonomics 5: Economics of IP: The Paradox of Fashion

The height of feline fashion?

Can this really be the fifth in the IPKat's series of Katonomics posts, on the economics of intellectual property? It is -- and this week our wonderful resident Katonomist Nicola Searle tackles for the first time the economic rules that govern one of the most complex, frustratingly unprotectable and ever-fascinating sectors, the fashion industry. This is what she says:

"The Paradox of Fashion 

Fashion presents a bit of a conundrum; despite relatively weak IP rights, the fashion industry flourishes.  If IP encourages innovation, then how does fashion churn out new designs and trends?  The answer is copying. 

Economists have paid little attention to the fashion industry, let alone IP in the fashion industry.  Indeed, most of the analysis of the topic has been done by non-economists (gasp!). An excellent example is this TED talk by Johanna Blakely.  Thus, for this post, I will benevolently go interdisciplinary (and economists wonder why we’re accused of being snobs…).      

The fashion industry functions with changing trends which incorporate planned obsolescence.  The industry needs older designs to fall out of fashion (i.e. to become aesthetically obsolete) so that demand can be generated for newer designs.   

According to traditional fashion theory, high-end design houses dictate fashion (let’s ignore Crocs).  Starting a trend confirms a design house’s success, creative capacity and ranking in the fashion hierarchy.  The designs displayed in catwalk shows andcouture lines are loss-leaders that establish exclusivity while promoting the designer’s cheaper, higher margin lines. 

These designs are then inspired/copied by the high street (as per this WGN blog). This copying both confirms high-end design superiority (imitation is flattery) and speeds up the fashion cycle by making designs peak in popularity more quickly.    

In addition to trickle-down design, the industry collectively decides colours.  Ever wonder why every store is carrying chartreuse?  Colour organisations collectively decide seasonal colour palettes.  The benefits are many: economies of scale, increased demand from complementary goods (you’ll need a particular shade of brown to match that chartreuse) and planned obsolescence.  In this instance, the “copying” of colours is organised by industry. 

Furthermore, design houses copy from the past (the “prior art” of fashion).  IPKat readers may have survived the rise and fall of acid-wash jeans, only to find them back in fashion. Kate Middleton’s 2011 wedding dress owes a lot to Grace Kelly’s 1956 dress.  It is difficult to find fashion items that do not borrow from prior fashions.  In patenting terms, you could argue that the inventive step of fashion design is low. 

So we have copying condoned in at least three cases: flowing down the fashion hierarchy (high street copying catwalk), within the industry (colour coordination) and across time (copying prior art.)  For analysis of the business ethics of all this copying, check out Australian academics Hilton et al’s paper. 

However, this culture of copying is not universally beneficial.  Without the benefits of scale and status of established designers, copying can be damaging for newcomers. Smaller players are relatively more affected if their sales are impacted by copying and lack the resources to seek legal recourse.  Furthermore, the market structure currently allows high-end designers a lead time advantage.  With the advent of fast fashion, clothing “inspired by” high-end designs may reach customers before the original designs (more on this by C. Scott Hemphill and Jeannie Suk).  Fast fashion may challenge the current of copying.

Counterfeiting in fashion is a different story.  A counterfeit good imitates through the use of trade marks or other protected properties without the permission of the owner.  Unlike the lesser sin of being “inspired by,” counterfeiting undeniably infringes IP rights. 

From the consumer side, the consumption of counterfeit fashion goods is often the consumption of counterfeit status goods. A Fendi at a fifth of the price? Fabulous. The economic reasoning behind consumer demand for these goods includes Veblen’s conspicuous consumption, status signalling and reference groups.  Economists are not particularly welcoming to this behaviour and the economics of happiness, as examined by the UK’sAndrew Oswald, argues that we would be happier without it. 

For producers, counterfeiting can damage brands and represent lost sales.  However, the evidence is ambiguous.  As counterfeits are poorer quality than original fashion goods, the products are sufficiently differentiated as to not be substitutes.  Counterfeit goods may advertise or be the “gateway drug” for legitimate goods.  Like piracy, the effects of counterfeit goods are difficult to determine. There are very few empirical economics papers addressing counterfeits and fashion (Yi Qian, who examines Chinese shoe manufacturing, is a notable exception.) 

Fashion goods enjoy some IP protection from rights including design rights, trade secrets, trademarks, patents and, to a degree, copyright. As this handy WIPO guide notes, the fashion cycle may be too short to warrant investing in some forms of IP protection.  

Increased IP rights for the fashion industry, as currently being argued in the US, are not straightforward.  Determining where rights end and infringement begins is a challenge.  The AmeriKat has noted recent disputes regarding Louboutin’s trade mark over red soles for shoes.  

Increased rights might interfere with the culture of copying.  Tying up fashion’s “prior art” or restricting the trickle-down nature of design could limit the industry’s ability to generate new trends.  The success of the fashion industry despite limited IP protection suggests that lead-time, networks, industry norms and other factors are more important. On the other hand, increased IP rights might protect emerging designers or force designers to innovate around existing rights.  

So, that leaves us with our question of the week, should IP rights be increased for fashion to protect designs?  Or is the current regime sufficient?"