The fashion lottery: Cooperative innovation in stochastic markets

The fashion market is an anomaly: innovation is vigorous, but original producers are substantially unprotected against imitation. We account for this anomaly through a cooperative innovation model in which producers prefer an incomplete property regime that permits some imitation to alternative regimes that permit no imitation or all imitation, independent of budget constraints. A property regime that permits positive but limited levels of imitation operates as a collective insurance mechanism that alleviates the risk of recoupment failure in a market characterized by demand uncertainty, long lead times, skewed returns, and rapid product obsolescence. This model is compatible with producers' selective enforcement of intellectual property protections, privately administered quasi-copyright schemes, and institutional mechanisms that facilitate seasonal coordination of design outcomes. This model potentially generalizes to certain other markets in which innovation persists despite substantial imitation. © 2010 by The University of Chicago. All rights reserved.