Issue 6
Shopping for Gucci on Canal Street: Reflections on Status Consumption, Intellectual Property and the Incentive Thesis
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.
Monopoly, Mercantilism, and Intellectual Property
Within intellectual property, Darcy v. Allen and the Statute of Monopolies are frequently, almost reflexively, invoked as establishing a baseline norm of economic freedom from which governments depart when they grant exclusive rights to deal in any trade or article of commerce. Against this free-market backdrop, all such grants are suspect, and only those that are justified by reference to their originality or utility (copyrights and patents) are valid. Rejecting the dominant view of Darcy and the Statute of Monopolies, this Article provides a more detailed political and legislative history of both the compromise leading to Darcy and the adoption of the Statute of Monopolies than any to date, and consequently demonstrates that their true importance lies in their political, not economic, content. This reinterpretation suggests that both events are best viewed through the lens of political accountability, a departure from the prevailing understanding of these events, both in and out of intellectual property. The Article concludes by considering the ramifications that this new understanding has for modern debates about intellectual property. Both events suggest that politics and coalition, not litigation, is the most promising brake on the seemingly ever-expanding scope of intellectual property laws. Further, the mercantilist experience with market controls suggests that targeted measures like compulsory licenses are more likely to perpetuate rather than restrict the power of special interests who hold large amounts of intellectual property.