Thought Paper - Piracy Paradox

The article titled �Piracy paradox’ reminds me of classic one-liner; �reality is stranger than fiction’. As described in the article, studies have shown that cheap knockoffs actually works as a stimulus and are in fact an integral part of the overall growth of the fashion industry but still big fashion houses and original designers are concerned about copying of their original designs and lobbying for law to protect their designs. Why?

Answer to this puzzle lies largely in the loss aversion tendency explained in classic �prospect theory of utility’ proposed by Kahneman and Tversky which states that losses looms larger than gains. Big fashion houses are feeling sales loss to cheap knockoffs much bigger than the gains of increased brand values and higher demand for the new and original designs (translating to higher prices to their products) even though evidences are contrary. That the value function for losses are steeper than that for the gains can be explained by the fact that 500 $ loss is felt much more to individuals than joy of gaining 500$. This tendency is demonstrated several times by different experiments by psychologists including Kahneman and Tversky in different contexts. This effect is multiplied by an �endowment effect’ where designers start feeling ownership of their design and hence value of their work and perceived loss looms much larger than actual value. This can be explained by the fact that people often price their items much more than what they would have paid for the same because they �value’ it much more with the feeling of ownership.

Another reason for this behaviour can be compared to the quote �one bird in hand is better than two in bushes’. The impact of piracy on sales is direct and widely publicised where as gains are lagging and indirect. Traditional theory of economics also predicts that when supply increases, demand and prices go down. Even though increase in supply of cheap knockoffs reduces demand for original �design’,