Reports

The Short and Long-term Impacts of Fashion Knockoffs on Original Items

Gil Appel, Barak Libai, and Eitan Muller, 2013, 13-108

The question if the U.S. should legally forbid the copying of original fashion designs (often labeled design piracy or knockoffs) is an ongoing active debate among legislators and industry advocacy groups, and in the legal academic literature, with some claiming that the benefits of knockoffs may outweigh their damage to the fashion industry. It has also drawn much attention in the global fashion market, as the use of quick imitation in designs has become a flourishing industry in various countries, and could be substantially affected by changes in the legal status of design piracy. Since 2006, seven separate bills that would protect fashion items from design piracy (mainly via a legal protection period, such as that instituted in the EU) were introduced in the U.S. Congress; however, none of them has been approved.

Surprisingly, while marketing knowledge and formal approaches related to product growth and profitability are very relevant for this discussion, much of the debate has been based on anecdotes and conceptual arguments and not on empirical analysis of the financial consequences of design piracy.

In this study, authors Appel, Libai, and Muller provide the first structured analysis of this important issue. They build a fashion diffusion model and use data on 15 fashion products from Google Trends, as well as published industry statistics, to calibrate it. Using simulations they can then examine the potential financial consequences of a knockoff on the original item, focusing on three main effects: acceleration, whereby the presence of a pirated design increases awareness of the design, and thus can have a possible positive effect on the sales growth of the original; substitution, the loss of sales to people who would have purchased the original design, and buy the knockoff instead; and uniqueness, the loss of sales that occurs when a design becomes more ubiquitous as a result of the knockoff.

Three particularly notable findings emerge from analysis in this study:

The overall knockoff effect. Taking into account the growth patterns examined, the entry of a knockoff has an overall negative effect on the financial performance of the original. In over 97% of cases, the combined harm due to substitution and uniqueness is greater than the positive effect of acceleration, with the net present value (NPV) going down 13% on average. These results support the concerns voiced by industry groups regarding the harm done by knockoffs.

The role of need for uniqueness. Substitution is often emphasized as a means by which pirated goods cause direct harm to the profitability of originals, and acceleration has been highlighted as a potential positive effect of design piracy. Yet this study shows that both these effects may be dominated by loss of uniqueness, a factor that has been less emphasized in the context of the monetary influence of knockoffs. In the data ranges analyzed, on average, acceleration has a positive effect of about 9.5% on the profits of the original, substitution has a negative effect of 5.5%, and uniqueness has a negative effect of 18.1%. Loss of uniqueness continues to be the dominant effect even when consumers’ threshold levels are much higher than the levels inferred in this analysis.

The role of time lag prior to knockoff entry. Given calls to protect original U.S. fashion articles via a legal protection period, similar to the case in the EU, the authors also examine the effect of the duration of a protection period (i.e., a time lag between introduction of the original product and the entry of a knockoff) on the original product’s NPV. They find that short protection periods have little effect due to the opposing forces of uniqueness and acceleration. However, for longer periods (one year or more, in the ranges of the data), a positive effect begins to be observed, and it grows in an almost linear pattern as the protection period becomes longer. A legal protection period of three years, as proposed for the U.S., reduces harm to the NPV by about 44% and a period of five years reduces harm by about 73%.

Gil Appel is a doctoral student in marketing, Guilford Glazer Faculty of Business and Management, Ben-Gurion University, Beer Sheva, Israel. Barak Libai is Associate Professor of Marketing, Arison School of Business, The Interdisciplinary Center, Israel. Eitan Muller is Professor of Marketing, Stern School of Business New York University, and Professor of Marketing, Interdisciplinary Center, Herzliya, Israel.

Acknowledgments

The authors would like to thank On Amir, Michael Haenlein, Liraz Lasry, and Irit Nitzan for their advice and help during the research process.

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Innovation Diffusion and New Product Growth
Eitan Muller, Renana Peres, and Vijay Mahajan (2009) [Book]

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