Why Designers (Or At Least Their Business Partners) Hate Knockoffs

One of these things is not like the others. Yep, you guessed it: the shoe on the far right is a genuine Christian Louboutin Bruges pump. As for the others: knockoffs. In this post, I'm using the term "knockoff" to refer to a copy or imitation of an item which is distinctive because of its design. For example, an imitation Bruges pump or Balenciaga motorcycle  bag would be a knockoff. I am not talking about trendy items that merely look alike.

In economic terms, knockoffs are substitutes for a good. Economists often talk about substitutes as negatively impacting demand for a good by raising the price elasticity of demand for that good. Generally speaking, the more substitutes there are for a good, the less people are willing to buy the good as the price increases. Substitutes reduce the price elasticity of demand for a given item and thus reduce overall sales.

Knockoffs can negatively impact demand for a fashion good in two ways: by increasing price elasticity of demand for a good, as just discussed, or by eroding the exclusivity of a good. The manner in which a knockoff reduces demand for the original product depends on whether it is a close substitute or a weaker substitute--a distinction which, in fashion, it seems, has to do with market segmentation.

To be clear, a close substitute is a well-executed knockoff; one that is nearly indistinguishable from the original good or else possesses all of the defining characteristics of the original design. Poorly executed knockoffs are weaker substitutes. The fact that they are copies is immediately apparent to the discerning fashion consumer as these substitutes are often made of low quality materials and look cheap. WWD's Fashion Dictionary characterizes the fashion market as comprising five segments or "price levels": budget, moderate, better, bridge, and designer. (We could add to this list a category called "low-end" on the bottom and "haute couture" on the top, perhaps even "demi-couture" between "designer" and "haute couture," but this list provides a decent picture of segmentation in the fashion industry for the purposes of this post.) Well-executed knockoffs are generally produced for the "better" segment, and occasionally the "bridge" segment. Poorly executed knockoffs are usually made by "budget" and "moderate" producers.

To understand why market segmentation and the closeness of the substitute matter, let's consider a specific case in which one or more brands knock off the design of another. We'll look at a case involving shoes because as I write this post I am finding it much easier to identify knockoffs of shoes than knockoffs of pieces of clothing. We'll take a look at what happens when a shoe designed for and originally offered by a producer in the "designer" segment is knocked off by producers in the "budget" and "moderate" segments. Then we'll consider what happens when a producer in the designer segment is knocked off by a designer in the "better" or "bridge" segments.

The case of the Louboutin Bruges pump allows us to consider the impact of low and high-end imposters on demand for the original Louboutin product. What does the introduction of substitutes in the "budget" and "moderate" segments (which are poorly executed knockoffs and thus weak substitutes) mean for sales of the Bruges at Christian Louboutin? As the masses gain access to similar styles, the Bruges pump loses key characteristics that contribute to high demand for a fashion good: exclusivity, novelty, and distinctiveness of design. In short, following the introduction of a wide array of weak substitutes, the Bruges is no longer "special." It is in this manner that weak, low-end to mid-market substitutes can reduce demand for a distinctive designer good. Weak substitutes do not tend to reduce demand for high-end goods by increasing the price elasticity of demand for these goods. This is because the consumers who actually demand the original designer goods such as the Louboutin Bruges pump (i.e. those who are willing and able to purchase the Louboutins) are customers who typically purchase shoes in the "designer," "bridge" and perhaps "better" segments. Most of these customers would either (a) be wealthy enough not to have to consider purchasing substitutes for the $735 Louboutins or (b) be too discerning to settle for the poorly executed substitutes in the "budget" and "moderate" segments. The availability of well-executed knockoffs in the "better" or "bridge" segments can lead to increased price elasticity of demand for the original good. With substitutes such as the Stuart Weitzman take on the Bruges pump available to them, consumers in the "better" or "bridge" segments who would have "traded up" for the Louboutin Bruges in the absence of an acceptable substitute become less likely to purchase the Louboutin Bruges. The extent to which "better" or "bridge" segment knockoffs reduce demand for original "designer" shoes depends onf the proportion of potential Louboutin customers who generally purchase "better" or "bridge" products.

In sum, close substitutes, which are generally made by "better" and "bridge" producers, can reduce demand for an original fashion product by making it more price elastic. Weak substitutes, which typically fall within the "budget" and "moderate" segments, can reduce demand for an original good primarily by eroding the exclusivity of the design.

This reasoning can help us understand why some distinctive fashion goods remain in high demand for the duration of the season while others go from "hot" to "not" in a matter of weeks. This summer you might have noticed that some stores carrying the Chloe S/S 2006 wedges had trouble getting rid of them. I am sure that this can be explained in part by the fact that everyone and their brother in the mid-market came out with a knockoff version.

Not surprisingly, this logic also applies to considering how counterfeit goods will reduce demand for designer goods. Good fakes might increase the price elasticity of demand and thus decrease actual demand for the good, and if there are enough of them floating around (Louis Vuitton monogram bags, anyone?), may also reduce demand for the original good by eroding its exclusivity. Bad fakes do not cause the original good to become more price elastic but reduce demand for the original good by eroding its exclusivity (as in the case of Burberry and Chavs).

I'd be interested to hear others' opinions of this assessment. I have a lot more to say on the subject of knockoffs but in the interest of keeping this post at a decent length I think I will save some for later. Anyhow, maybe you'll look at knockoffs in a new light next time you go shopping!

Comments

[The Bargain Queen]

Excellent points -- you make me wish there was an ethical way to buy the things I love for prices I can afford.

In Australia we don't get the Target designer lines, so all I can do is buy things on clearance when I can find them and go with the knockoffs the rest of the time.

Oh, for a massive pay rise! ;)

[Elsa]

Hey Bargain Queen!

Well...you might be happy to know that a lot of economists (even yours truly at times) consider it ethical for consumers to behave in such a way as to maximize their well being...so some economists might say, go for the knockoffs! I remain ambivalent on the subject, but I am totally with you on wishing for a massive pay raise!

My favorite type of purchase is when you find something exquisite and original that is made by a lesser known designer at a decent price. You derive more utility/value from it because no one else has it and it doesn't look like anything else on the market...so its novelty doesn't fade quite as quickly. Anyway, happy shopping!

[Joi (stereoette)]

Wow, I just recently discovered your blog, and I love that it appeals to my inner design addict (I'm a crafter) and inner nerd (and a lawyer).

I think the issue of knock offs is an interesting one both from a legal and ethical perspective. I agree with your point on knock offs reducing demand. While I was in law school I didn't agree with the concept of dilution, but as I get more into fashion, the effect of "lesser" or "different" brands preying on iconic design becomes more vivid for me.

Keep up the econ analysis! I'm loving it!

[Kristen]

OMG. Elsa, you are such a goddess. This is a great post!

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