The Knockoff Economy (33 page)

Gosline’s study suggests that fake luxury goods are a very effective form of advertising: people who buy them and live with them have a significant probability of being converted to the brand and buying the real thing once they can afford to do so. Copies, in short, are a kind of “gateway drug” that leads to consumption of the harder (or at least, more expensive) stuff. What’s more, every time consumers go out with their fake item, they’re publicly
displaying the desirability of the brand, sparking trend-driven consumption that spills over—or up—to the original version.

Gosline’s and Barnett’s findings are broadly reinforced by other recent research. A 2011 study by economist Yi Qian for the National Bureau of Economic Research looked at data from 31 branded shoe companies, as well as a number of counterfeiters, operating in China in 1993-2004. The study likewise found that counterfeiting had a surprisingly
positive
effect on the sales of high-end branded items. The tendency of counterfeits to advertise the desirability of the branded product—what we will call the “advertising effect”—outweighed any substitution effect, by which we mean the effect of consumers purchasing the counterfeit instead of the original. The substitution effect is harmful for creators, and the advertising effect is helpful. And only for low-end branded products did the substitution effect outweigh the advertising effect.

These results lead to two key points. First, trademark can actually provide some of the value to innovators that patent and copyright are designed to offer. Owners of well-known brands can often maintain a stable market share and demand a significant price premium for their products—even when cheap copies are widely available. Pfizer can charge high prices for Advil to those who prefer the brand name; CVS can sell generic ibuprofen to everyone else. Second, copies of branded goods—counterfeits—can have a counterintuitive effect on originals. While these copies can steal away some would-be buyers of the original, they also can help create new buyers through the advertising effect. Some counterfeit buyers “graduate” to the real thing, whereas others who never buy a counterfeit become buyers of the original because the counterfeits serve as advertising.

And importantly, this second point is not limited to formal brands—that is, to the kinds of brands protected by trademark law. The basic dynamic of the advertising effect can also be seen in individual creators, who can build a very valuable name for themselves as innovators.

Los Angeles-based chef Ludovic Lefebvre, for instance, is not a brand in the formal sense. But his name and personality draw big crowds, providing him with several ways, besides actually getting behind the stove, to gain value from his skill as an innovative chef: cookbook author, consulting chef,
Top Chef: Masters
contestant, and so forth. In 2011, he even debuted his own television show,
Ludo Bites America,
on the Sundance Channel. And it is enough to know that a new restaurant is run by Lefebvre—or by any of a
number of other famous chefs—for legions of fans to show up.
^*
Like shoppers in the shoe store seeking the Adidas rack, they know what the Ludo Lefebvre brand entails.

Unauthorized copies, in turn, can serve as unintended advertisements in the same way we have described. In some cases the unauthorized copy is a noteworthy dish that soon appears in competitor restaurants and sparks interest in the original. Being copied in this way can reinforce a reputation as an innovator and elevate a chef’s standing in the public eye. In other cases, as with Pearl Oyster Bar and Ed’s Lobster Bar, what is copied is not a dish (or two) but an entire restaurant or culinary approach. As described in
Chapter 2
, Pearl Oyster Bar and Ed’s Lobster Bar, both located in downtown Manhattan, are pretty similar in look, feel, and menu, though whether Ed’s is a direct copy of Pearl’s—or simply a co-equal variant of the basic idea of a New England shellfish shack—is a more difficult question that divides the food cognoscenti.

But whatever the true answer—and the dispute settled before going to trial, so no legal ruling on the question emerged—assume for a moment that Ed’s is indeed a deliberate copy. It is far from clear that Ed’s copying harmed Pearl Oyster Bar, or for that matter that the arrival of Mary’s Fish Camp, an earlier offshoot of Pearl Oyster Bar, did any harm either. Despite being within a mile or so of each other, all three restaurants do a brisk business. (Ed’s even recently opened a satellite a few blocks away.) And on several recent visits, we found that Pearl Oyster Bar seemed to have far more business than it could handle—a result that, at least according to the 2011 Zagat restaurant guide, is the norm for Pearl. Having competitor shellfish/seafood bars that appear to be knockoffs may simply serve to trigger the advertising effect: to make customers want to try the original, and putatively best, version—or at a minimum to try all three spots and compare.
^*
And maybe the copies have fueled a trend of oyster bar-hopping, spurring the growth of all competitors.

Advertising via copying is perhaps the most powerful endorsement a brand can hope for. Few people believe that the celebrities in glossy product
ads really consume (or are actually willing to pay for) the product they are shilling: we are too jaded for that, even if the halo effect of a celebrity somehow renders the item in question more desirable. In this sense, conventional advertisements are inherently limited because they rarely convey authentic endorsement. A copy, by contrast, is as sincere an endorsement of quality and desirability as any creator could hope for.

Brands, first-mover advantage, norms, the power of performance, trends and fads, and open-source innovation: all are important elements in the many creative industries we have explored in this book. And to varying degrees, they provide new ideas and new approaches to the many creative and often copy-plagued industries we have not discussed. To be sure, we are not offering a guaranteed tool kit of anti-copying strategies. Nor are we Pollyannas who believe that all copying is harmless. But a clear-eyed and realistic look across the many and diverse innovative industries in the world shows that there is substantial reason for optimism, even in a world in which copying is becoming ever easier and more prevalent.

This coming world is sometimes depicted as either a technology-driven utopia in which information finally gets to be free, or a looming cultural wasteland in which “digital parasites” destroy first one, then another, creative enterprise.
³⁴
Both of these positions are overheated and hyperbolic. Rules against copying are essential to our economy; as we have repeatedly emphasized, we do not want to abolish IP.
³⁵
At the same time, the
already-existing
creative fields that we have explored make plain that ever-freer and easier copying is not an inevitable death sentence for creativity and innovation. And as we will describe in the Epilogue to this book, even in an arena such as music, commonly considered the paradigmatic example of a creative industry plagued by pirates and parasites, the reality is different from the rhetoric.
Music
is thriving, though the
major music labels
are not.

In short, creative output is a more complicated process than many assume. Our legal structure of innovation—the IP system—is but one part of that process. We will wrap up this concluding chapter by briefly considering some of the broader factors at work in innovation. These broad factors, such as the tendency, which appears endemic to human nature, to make rosy-eyed predictions about our future success, provide further support for the idea that creativity is more resilient to copying than conventional wisdom suggests.

If we step back from the particular stories we have told and consider what generally drives people to create and innovate, two basic, even obvious, factors are paramount.
How much does it cost to create?
And,
what is the expected return on that creation?
In other words, the rate of innovation broadly reflects the costs and benefits of investing time and money in creative work. Many creators, to be sure, create for the love of it. But in the end, sustained innovation requires adequate incentives. This premise is a foundation of the monopoly theory of innovation. But it is equally central to our account of innovation; in this book we have simply illustrated the many more complex creative incentives that exist, incentives that—as the sustained success of fashion, food, and the like demonstrate—keep creativity alive despite copying.

In this final section, we want to extend the analysis with two points, both of which make us more optimistic about the future of innovation. First, the benefits of innovation are often overestimated
by the innovator,
which serves to induce more innovation than otherwise and may also make innovation more resilient in the face of losses from copying. Second, the costs of creation are dropping in many fields, which has a similar effect on innovation: lower cost generally means more output than otherwise. Together, these two phenomena provide more reason to think that a world of easy copying is not necessarily a world of little creativity.

Consider first the benefit side of the equation. Copyright and patent are fundamentally about ensuring sufficient benefit to creators. Their primary justification is that they raise the expected return on innovation by ensuring that copyists cannot undercut the market for creations after they are made. Discouraging copying allows innovators to reap more of the benefits of their innovations. This much is conventional wisdom, and we agree that IP law generally has this positive effect. But what this underscores is that the key is
return on innovation, not restrictions on copying.
As long as the return is high enough, we will see innovation.

This leads to an obvious, but too often overlooked, point: legal rights are not the only way to raise that return. Innovation can be induced by other things—ranging from social norms to tax credits to prizes.
^*
And some of the
forces incentivizing innovation are even more fundamental than these—they arise not from external prods, but from basic human psychology. Consider again the cost-benefit calculation of creating something new. It is not actual return but
perceived or expected return
that most powerfully shapes decisions to create. And because there is good reason to think that we all are prone to overestimate the benefits that will flow from our creativity, we are likely to overinvest in it. This “optimism bias” is one more reason to think that creativity and innovation are more resilient in the face of copying than conventional wisdom would suggest.

Conventional thinking about innovation and IP relies on the concept of a rational innovator. It assumes that innovators calculate, either explicitly or implicitly, the cost of creation versus the size of the return they will likely enjoy. A writer might anticipate a certain advance from her publisher; a musician might estimate the sales of a new song. This expected return shapes how much effort they pour into creation and what kinds of creation they pursue. Abundant research in economics and psychology, however, suggest that their judgments are often likely to be wrong—and systematically so.

As many studies have found, individuals are very bad at assessing their own future prospects. They have a pronounced optimism bias.
³⁶
They think they will succeed where others have not, and they heavily discount the prospect of failure. Nearly all newlyweds, for example, believe they will not get divorced, when in fact a large minority will—and often within a few years. Likewise, students wildly overestimate their likely grades, even in the face of stiff competition. Like the residents of Lake Wobegon, we all want to believe we are above average.

Optimism bias has been shown to apply broadly to life events, and there is no reason to think it does not also apply to innovation.
³⁷
Indeed, two laboratory studies conducted by one of us (Sprigman) and Christopher Buccafusco of the Chicago-Kent College of Law showed that creative artists believe their work is far more valuable than do potential buyers.

In the first study, several hundred subjects were given the opportunity to buy and sell chances to win a haiku contest. The subjects were randomly assigned to be Authors or Bidders. Authors were told that they would be
competing in a contest with nine other writers. A poetry expert would select the winner, who would receive a $50 prize. Each Bidder wrote down the amount he would be willing to pay to purchase a specific Author’s chance to win. Similarly, each Author wrote down the amount she would be willing to accept.
³⁸
On average, Authors were willing to sell their chance of winning the haiku contest for $22.90. But Bidders’ average willingness to pay was less than half: only $10.38.

These results are consistent with the hundreds of other studies that have confirmed optimism bias in a wide variety of settings. Authors believed that they were roughly 30% likely to win a contest where in reality they had, on average, a 10% chance. They were irrationally optimistic about the reward they expected.

These results were replicated with would-be professional artists—painting students from the School of the Art Institute in Chicago. The students were invited to enter a medium-sized painting into a contest. The Painters were told that they would be competing with nine other entrants for a $100 prize judged by an expert. Each Painter was matched with one of 10 additional subjects acting as Bidders.

Here too there was a huge gap between bidders and creators—in fact, the gap was quite a bit larger, which suggests that would-be professional creators tend to over-value their work even more than do ordinary people. The Painters demanded on average nearly $75, while the Bidders were willing to pay less than $18. And again, the biggest cause of the widely diverging variations was over-optimism. Painters believed that they had more than a 50% chance of winning the contest. The real number, since there were 10 of them, was (on average) 10%.