The standard incentive rationale for intellectual property rights assumes (among other things) 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 Essay accounts for this anomalous result by proposing a mechanism whereby counterfeiting 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 a rational-choice approach to intellectual property rights that unusually takes into account the cyclical and interdependent consumption patterns peculiar to fashion or status goods markets. Building on the existing economic literature on fashion goods markets, the Essay proposes that counterfeiting (provided it is visibly imperfect, which is typically the case) 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 “original” good, and by advertising and even exaggerating the popularity of the original good (in addition to its imitations) among “trend-following” consumers.
Given these benefits, counterfeiting should not always be expected to depress innovation incentives, which successfully accounts 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 result apparently counsels against allocating significant social resources to enforcement of anti-counterfeiting statutes, it nonetheless remains undetermined whether tolerating positive levels of imperfect counterfeiting is the preferred policy option, given the fact 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.