The fashion lottery: cooperative innovation in a stochastic market
Résumé
The fashion market is an anomaly: innovative output is vigorous but original producers are substantially unprotected against widespread imitation. In particular, fashion houses make substantial investments in seasonal collections subject to an incomplete regime of intellectual-property protections, consisting of strong trademark protections and weak copyright, trade dress and other design protections. We account for these differentiated intellectual-property protections through a “cooperative innovation” model where original producers rationally prefer an incomplete property regime that permits some imitation to alternative regimes that permit no imitation or all imitation, independent of budget constraints. A legal regime that permits a positive but limited level of imitation alleviates the fundamental economic problem faced by original producers: namely, the stochastic risk of product failure, and the attendant risk of firm insolvency, in a market characterized by extreme demand uncertainty, long production lead times, skewed seasonal returns and rapid product obsolescence. This risk-based model of cooperative innovation accounts for selective enforcement and lobbying strategies, anticipates a wide array of institutional mechanisms that facilitate the graduated coordination of seasonal design outcomes, and potentially generalizes to other innovation markets where firms must make irreversible development, marketing and production expenditures subject to extreme demand uncertainty and the associated risk of recoupment failure.