Book Review: The Knockoff Economy

Intellectual property rights face a significant trade off, identified by the economist William Nordhaus. The trade-off is between having weaker (or shorter) intellectual property rights, which would lead to under-investment in intellectual property development, or having stronger (or longer) intellectual property rights, which would lead to under-consumption of intellectual property. For instance, if the government strongly protects intellectual property (through longer periods of copyright or patent protection), then that increases the incentives for inventors or artists to invest the time and effort necessary to create new inventions, write new books, create new artworks and so on. This is because the strong intellectual property rights create limited natural monopolies for the rights holders, allowing them to raise the price and increase their profits. However, those higher prices reduce the consumption of the intellectual property relative to the case where intellectual property rights were weaker (or less long-lasting).

However, is it always the case that stronger intellectual property rights foster innovation, and weaker intellectual property rights deter inventors or creators from inventing or creating? This is the question that is addressed in a 2012 book by Kal Raustiala and Christopher Sprigman, entitled The Knockoff Economy: How Imitation Sparks Innovation. In the book, the authors look mainly at three industries (fashion, cuisine, and stand-up comedy) and show that substantial innovation occurs in each case in spite of a lack of strong enforcement of intellectual property rights. Indeed, in the examples discussed in the book, copyright and patents are either not used, or are not available. And yet, in all cases there is a great deal of ongoing innovation. This narrative provides a strong counter-argument to the seemingly-constant increases in the strength and length of intellectual property rights protection being granted in many western countries, especially the U.S.

As I was reading through the book, I made a large number of notes of things I wanted to discuss in my review, but there is really no way I could address them all and keep this post manageable. Because in each of the three cases that make up the first three chapters of the book (fashion, cuisine, and stand-up comedy), the reasons why innovation remains high are quite different. On fashion, the authors note that:

...the apparel industry is not just surviving - it is thriving. Extensive and legal copying accelerates the fashion cycle, banishing once-desired designs to the dustbin of apparel history (perhaps later to the dusted off and reintroduced) and sending the fashion-conscious off in search of the new, new thing.

In the fashion industry, the act of copying drives innovation because there are customers who really want something new, but they are only driven to something new once many others have started wearing the old, new fashions. Cuisine, though, is different. It is robust to copying because you aren't really buying just the meal but an experience, which is difficult to copy:

The dish you crave must be purchased as part of a larger, multifaceted transaction, replete with various courses, beverages, and side dishes. There are ambience, service, energy, and other intangibles in the mix. All of these factors work together. Copying one aspect - the main dish - may be easy. Copying the experience in full is virtually impossible. The experience is less one of buying a product and more that of enjoying a performance.

Chefs may copy each others' dishes, but they also care about their reputation, which is even more the case for stand-up comics. It is social norms that keeps copying of stand-up jokes in check. The authors write that:

...comedians' norm system includes informal but powerful punishments. These start with simple bad-mouthing and ostracism. If that doesn't work, punishments may escalate to a refusal to work with the offending comedian. Occasionally, comedians threaten joke thieves and even beat them up. None of these sanctions depend on legal rules - indeed, when comedians resort to threatening or beating up other comics, that's obviously against the law. Yet these tactics work.

That last point reminded me of Elinor Ostrom's work on informal agreements to deal with common resource problems, and it would have been good if the authors had also noted this parallel. The idea of the fashion cycle made me think about viral smartphone apps - could a case be made for removing copyright protection from smartphone apps, in order to drive more innovation (if indeed, we want more innovation in that space)?

The book looks also in less detail at a number of other areas of innovation including football (of the American variety), fonts, finance, and databases. In these cases, the authors draw the important distinction between 'pioneers' (those who first invent something) and 'tweakers' (those who take the original invention and improve it). This process of pioneer innovation followed by tweaking has been a driver of improved quality in many cases, and the authors essentially argue that this is likely to be true in many more domains. It is an attractive argument, particularly when you consider an area like pharmaceuticals, where monopoly pricing is problematic.

Overall, I really enjoyed this book. If you're interested in intellectual property or innovation, then this is definitely a good read.