The Knockoff Economy

by Kal Raustiala

  • Other industries demonstrate the important role that social norms can play in constraining or shaping copying, even when legal actions prove impotent or impractical.

  • In some industries creators and owners have blunted the negative effects of copying by redefining the good from product into performance—reducing the impact of copying on their economic success.

  • Still other creative industries highlight the power of open-source methods to lower the costs of innovation—and thereby promote more of it.

  • First-mover advantages offer enough value to some producers that innovation is profitable, even if those innovations are later copied.

  • Finally, several cases illustrate the power of brands and trademarks. Brands can limit the market share of copies, but copies can also serve as advertisements for brands. This effect casts the costs of copying in a very different light.

  These six lessons are surely not the only ones that can be derived from our case studies. But we think these points are the most important and generalizable. Together, they show that markets like comedy and cuisine have more to teach us than we had realized. And, as we noted earlier, they suggest that the future of the ideas economy is not nearly as bleak as many believe.

  Trends and Cycles

  Apparel is a global business (and for many, a global art form) with a huge economic impact. Despite the fashion industry’s size and cultural importance, its innovation practices have not been widely studied.13 Yet the fashion world is full of important and interesting features. Maybe the most striking is the paradoxical effects of copying on creativity.

  Copying in the fashion world has two unexpected effects, both of which make copying an essential partner to innovation, not an impediment. The first we have called induced obsolescence. New designs tend to spread from a small group of fashion followers to the larger mass of consumers. As these designs are copied and then spread throughout the marketplace, they lose their appeal for the earliest adopters. And as a design spreads further, it begins to tip over and, after reaching its peak, rapidly becomes obsolete. This in turn creates demand for new designs to take its place.

  This is the familiar fashion cycle. Designs debut, diffuse, decline, and die. The special role of copying in this dynamic is that it accelerates the cycle, pushing the fashion-conscious to more rapidly drop their old look and find a new one. And that in turn incentivizes designers to create new looks. Copying, in short, spurs creativity as designers seek to offer newer, fresher designs to replace those that have saturated the market.

  The second important effect is anchoring. Fashion is ruled by trends, and trends are made by copying. Trends give consumers important information: they tell us what to wear if we want to remain in style. Trends also make it easier for designers and manufacturers to know what will sell, and to design accordingly. Trends, in short, are a coordination mechanism. They make it possible for many individuals to jump on the same bandwagon—until, by doing so, the trend eventually withers and is supplanted by a new trend.

  Together, these two effects help explain what we call the piracy paradox. Copying helps, rather than harms, creativity in the fashion world. The piracy paradox, which reflects the fundamentally social nature of fashion, is a powerful reason the apparel industry has remained so creative despite rampant and open copying. There are, of course, limitations to the scope of innovation we see in fashion—clothes do have to fit the human body.* But there is nonetheless a vibrant range of creative designs put forward every season and indeed every week. The paradoxically positive effects of copying help explain how this level of creativity—and commercial success—is possible: by rapidly diffusing a design, copying actually stimulates demand for the next design.

  Again, our point is not that there is a fashion cycle: that has been known since Shakespeare’s time.* It is that this cycle turns even more rapidly in a world of free and legal copying. And this is true because of a key feature of apparel: the consumption of fashion is a public act, not a private one. Fashion, because it is worn and can be seen by others, sends signals about the wearer. Some people, usually the early adopters of new designs, like to signal that they are different, and perhaps trailblazers; others (certainly a larger group) flock to what seems safe and accepted.14 Given a mix of flockers and differentiators, copying will lead to more rapid change in what is coveted—and that, in a competitive market economy, will lead to more rapid innovation as entrepreneurs seek to supply the new, new thing.

  The fundamental dynamic of the piracy paradox is central to understanding how the apparel industry remains so successful in the face of copying. But it has broader implications. Fads and fashions are not limited to clothing; they are present in many pursuits that are social in nature and visible to others—in other words, in which consumption is external and expressive. From movies about vampires to soccer fans blowing vuvuzelas, fads come and go, and have done so for centuries if not millennia. While we hesitate to say that copying is essential to the creation of fads, it does seem intrinsic to many fads. Most fads require multiple versions of a central idea—often, it’s only when we see many imitators jumping in that we know a particular idea has tipped over into a full-blown fad.15 And just as copying helps to mark fads, and then to inflate them, it also plays a central role in their demise. When a fad grows too large and too prevalent, it fades, often more rapidly than it arose.

  To be sure, many differences exist among trends and fads. Our goal is simply to point out the central tendency and to note that, as in the fashion world itself, copying can serve to both grow and, ultimately, to kill a fad. That dynamic creates opportunity for entrepreneurs. But it also yields a powerful spur to creativity—one that has nothing to do with conventional justifications of IP nor with conventional fears of copying.

  We have seen fads at work, for example, in the creation of new fonts. Typeface designs catch on, close copies proliferate, and then, when the look has saturated the marketplace, the font world begins seeking the next design trend. The result is a proliferation of new fonts in a world that offers very little protection against copying. Because fonts are less easily noticed, and less personal a source of expression (though any author or wedding-invitation-sender knows that picking the right font is important), typeface trends come and go much less quickly than in fashion. But the fact remains that fonts are often external and expressive, and unsurprisingly they have fads too. Copying enables those fads to spread and, ultimately, to wither—leading to a need for newer and fresher font designs.

  The food world exhibits fads as well, and here too the ability to copy spurs creativity. Some food fashions are general—small plates, nose-to-tail eating—whereas others are specific to certain techniques (think sous-vide), tools (the $4,000 Pacojet ice cream maker), ingredients (bacon, fennel pollen), or genres (pie, or earlier, cupcakes). As in fashion and fonts, food trends spread because copying is easy and legal. As we described in Chapter 2, the same is even true of specific dishes, some of which, like the molten chocolate cake pioneered by Jean-Georges Vongerichten, are now ubiquitous. The freedom to copy allows trends and fads to spread quickly. But in turn it prompts creative chefs to seek new and distinguishing dishes, techniques, or ingredients. The culinary world is not nearly as faddish as the fashion world, and as we described, the mechanisms of creativity are a bit different. But there are important overlaps, and food, like fonts and fashion, illustrates that the dynamic of copy-induced creativity is present in many areas.

  Music, too, is moving in this direction. The music industry is exploring ways to emulate the dynamic of external and expressive consumption that the fashion industry exploits so well. The current leader in this, as in so much else in the music industry, is Apple. Apple’s iTunes gives users the option of sharing the content of their music collection with other iTunes users connected on the same network. In 2010, Apple took another step in this direction when it began not-so-gently nudging its users into its new music-centered social network, Ping. Ping shows people what their
friends and favorite artists are listening to, and gives them a very easy way to sample and buy into the trends that Ping highlights.

  With these moves, Apple hopes to make music consumption choices external and expressive in the way that fashion trends are, in the hope that consumers will be induced to buy more music to keep up with the trends in which their friends are participating. Like clothing, music is a powerful form of personal expression that can convey identity and establish status. But because music is often so private (especially in today’s world of ubiquitious earbuds)* its signaling power is limited. iTunes library sharing and Ping change this by harnessing new technologies to make song choices not just private preference, but public information.

  And these features don’t just provide information about the music a user buys—pirated music in a user’s iTunes library is also grist for the trend mill. If lots of people are pirating the new Bon Iver album, then Apple hopes that by communicating the album’s hotness, iTunes library sharing and Ping will lead more of the many law-abiding people to buy it from the iTunes Store. Piracy provides valuable information about tastes and trends. People copy things they desire and share things they respect.

  We suspect other creative industries can find similarly powerful ways to leverage the power of external and expressive consumption to make copying work for them. As Apple’s moves suggest, the degree to which a product or industry taps into trend-driven innovation is not fixed: it can be altered by the technologies of consumption.

  Social Norms

  Social norms can play a significant role in shaping and constraining the effects of copying, whether that copying is legal or not. We found this to be true in the worlds of comedy, cuisine, and magic. Of course, social norms do not prevent all copying, though neither do legal rules about copying. And as the relevant social group grows and disperses, norms—which depend fundamentally on relationships and work best in communities—probably lose their power. But social norms nonetheless can be an important constraint on copying and can help divert copying away from its more harmful forms.

  The norms systems we’ve described share two important features. First, norms deter theft by rival creators. They do not map directly onto situations where copying is done on a mass scale by consumers. Nonetheless, as we will explain, there is reason to believe that at least some of the lessons of social norms can be adapted to discourage consumer piracy as well. Second, norms probably work best for individuals rather than firms. In innovative fields dominated by individuals, which characterizes many of the creative communities we have explored in this book, we see norms working, sometimes very well. In fields where large firms dominate, norms may be much less effective.

  Still, several of our case studies show that social norms can be very significant when a creative community seeks to regulate copying among insiders. The check on copying that social norms can provide often makes imitation less harmful to innovators. And norms can also provide an extra-legal means of redress to those whose work has been copied. Norms have one other noteworthy feature: because they are constructed within the relevant industry, they are more likely to reflect the particular nature of that industry and its competition-copying trade-offs.

  Comedians offer the most dramatic example of the power of social norms to constrain copying. Among comedians, the norms system operates effectively despite the fact that jokes and routines are formally covered by copyright. Comics prefer the system of norms because it is more tailored to their needs and much more useful to them. For example, copyright law only protects the precise version of a joke or routine; the comedy norms system protects the underlying funny idea or premise as well. So the “rules” in the norms system are quite different from those in IP law. This may be even more true for magicians, where, for example, the rules governing the disclosure of tricks deviate markedly from what the law requires.

  In comedy, and in magic, there is also enough of a critical mass of norms-followers to keep the system working well. Comedians and magicians have a high level of agreement about what the norms are and when they are transgressed. Enforcement is social and extra-legal—and sometimes even illegal and violent. But the key is that the norms system is widely agreed upon by insiders, and the public nature of performance helps to deter a lot of copying that would contravene the unwritten rules.

  Chefs exhibit some similar traits, though the norms in question appear to be less embedded and well established. Eric von Hippel and Emanuelle Fauchart’s study of Michelin-starred French chefs showed that norms about copying and attribution may be significant in the Gallic culinary world.16 We are less certain about the significance of social norms among American chefs,* who in our interviews demonstrated much more ambivalence about the need for norms against copying—and less clarity on what the norms, if any, are or ought to be. This may reflect the large and dispersed nature of the high-end restaurant world in the United States, a vast country with dozens of truly great restaurants and thousands of merely excellent ones. Or it may simply reflect differing social conceptions of what it means to be a professional chef. Either way, we think the evidence for the role of norms is weaker in cuisine than in comedy. Put differently, there must be other factors in the culinary world that explain why chefs remain innovative in the face of extensive imitation by others.

  Still, it is clear to us that many chefs, wherever they may be based, share a broad ethos about appropriate behavior with regard to ownership and attribution. This ethos does not track the rules of copyright and patent, and, as in comedy and magic, in some cases it focuses on different issues. For example, a theme that pervades our study of food is the central role of attribution. Many of the chefs we and others interviewed were not especially concerned about copying per se. They saw execution as central and, in some cases, viewed copying as the price of success—or even a desirable indicator of success.

  Still, many chefs felt that attribution was essential; they wanted to receive, or give, credit for creation where credit was due. (And to the degree copying is thought of as an indicator of success, attribution becomes even more important.) We will return to this theme of attribution and indication in the context of brands. But as this suggests, copying has a complex relationship to credit-claiming—and can serve as a valuable form of advertising for those who are truly innovative.

  Again, norms work best among individual producers who see themselves as part of, and seek the respect of, a professional community. Yet norms can play a role even among consumers. Consider the situation in comedy. The norms in the comedy world are developed and largely enforced by comedians themselves. More recently, however, fans have been posting videos of questionable performances and taking sides in disputes over copying. In this way fans shape the ensuing debate over copying—as Dane Cook’s complaint to Louis C.K., recounted in the Introduction, made clear.

  The ability of fans to play this role is of course driven by technology: it is much less effective to tell a friend that Comedian X copied a bit from Comedian Y than it is to post a cellphone video of the performance online (or to compare two such videos for similarities). The result in comedy, as in food—where fans often blog about and post photos of dishes, sometimes noting copies—is a form of consumer-based policing of the norms governing copying. And the same is even true in some niche forms of music, as we will describe in the epilogue to this book.

  In short, norms play an important role in enabling some creative arenas to reduce the harm from copying, just as a wealth of studies have shown that they play an important role in regulating social life, policing specialized markets, and generally providing “order without law.”17 Norms are not a panacea for copying, nor do they work in all areas. Yet a robust norms system can mitigate the downsides of copying, helping to transform copying from a threat to nuisance—and maybe even into a benefit.

  Product versus Performance

  If an item can be copied perfectly and sold cheaply, or made available free, convincing customers to pay for the original can be difficult.
(Just ask the music industry.) But some products simply cannot be copied perfectly. Often that’s because the product itself is really analog rather than digital—that is to say, not reducible to a perfectly replicable set of 1s and 0s, or the real-world equivalent. A terrific and innovative dessert is usually a handmade item that is likely to be a little bit different every night it’s made. Another chef may copy it, but the copy will rarely be identical to the original, and given that skill is often an important variable, it may well be decidedly inferior. The same can be said of a terrific joke or comedy routine.

  There is a second reason, however, that some products cannot easily be copied. It is because they are fundamentally about experiences, and experiences are even harder to reproduce. What we buy in these instances is less a product than a performance. Cuisine is again a perfect example. If a precisely rendered version of David Chang’s signature pork belly bun was available at street corner bodegas in Chinatown (and it may well be), what would be the effect on sales at his flagship restaurant, Momofuku?

  At some point, if Chang-style pork buns became ubiquitous, like any fad they would peak and then fade away, and perhaps harm Momofuku’s reputation and profits in the process.* But outside of that somewhat extreme scenario, the bodega pork buns do not really compete with the Momofuku buns, because dining at Momofuku is about more than just eating great pork buns—which, David Chang is the first to admit, is not really a very innovative dish anyway. It is about the clamor and energy of the crowd, the range of dishes available, the entire aesthetic of no reservations, no substitutions, spare décor, loud music, and colliding Asian cuisines that Momofuku represents. A Momofuku pork bun eaten at Momofuku, in short, is a particular experience that customers are willing to pay for (and wait for). A copy is just a really good pork bun.