In our first two posts, we wrote a bit about how two important creative industries, fashion and cuisine, do very well without much intellectual property. Notice that we wrote “without much” IP, and not “without any”. That’s because there is some IP that’s relevant to both. The fashion industry makes heavy use of trademark law to protect brands. But the actual appearance of clothes – the fashion design – is almost entirely unprotected. In cuisine IP plays a similarly peripheral role. A recipe cannot be protected. The narrative that goes along with it may be, but the recipe can certainly be copied without the narrative.
So both fashion and cuisine are low-IP industries, and both are intensely creative even though others are free to copy and often do. And as we describe in The Knockoff Economy, there are a lot of other industries that don’t rely much on IP law to motivate creativity. We spend the first four chapters of the book taking a close look at these industries, and noting the many different ways in which they work to allow creativity to co-exist with copying — or, in some cases, even use copying as fuel for creativity. The stories in these industries are all different, but they do fall into a few broad categories.
First, there are some that rely on informal rules against copying – “IP norms” instead of IP law. Stand-up comedy is one of these. In our chapter on comedy, we draw on earlier work that one of us (Sprigman) did with his University of Virginia colleague Dotan Oliar that documented stand-up comedians’ anti-copying norms and described how the stand-up community runs an informal but pretty effective community policing system to restrain copying. Chefs, we show, have some similar copying norms, though these norms not nearly as widespread or well-defined. We also discuss some other unusual norm communities, including one involving fans of jam bands.
Then there are some industries that rely heavily on first-mover advantage. You may not think of American football is a “creative industry.” Yet there has been, over the years, a ton of innovation in football on both the offensive and defensive side of the line of scrimmage, from the introduction of the forward pass to the spread offense, the zone blitz, the West Coast offense, the pistol, the 46, the wildcat, the no-huddle, and many many more. None of these have been protected by IP – though copyright and patent might have been useful for at least some of them.
How then do football coaches continue to innovate when others are free to copy them – and do copy, enthusiastically? The answer is that football coaches are incredibly short-term thinkers operating in an intensely competitive arena. A couple of wins can make a season, and a few good seasons – or one Super Bowl victory – can make a career. Under these conditions, any innovation that gives a team even a short-term advantage is worth making. And there’s another piece that’s very important: often it can take an imitator a while to copy a new offense or defense well. Why? Because players need to be re-trained, and also sometimes, innovations are built around players with specific characteristics. The spread offense, for example, often suits teams with smaller, quicker offensive linemen. So copying well sometimes means not just re-training, but re-building. And the time it takes to copy, and to copy well, increases the first-mover’s advantage.
We see something similar in the financial services industry. There is no question that the financial services industry has been innovative—and with surprisingly little reliance on IP (for much of the industry’s history, there were no business method patents, and even after these became available, they play a less important role than some had anticipated). The industry’s creative output has included, among other things, thousands of varieties of derivatives, bonds, currency warrants, credit and currency swaps, collateralized debt obligations, exchange traded funds, investment indexes, and the pricing models and trading strategies associated with these instruments. Whether all this innovation has been good for society is an interesting question, but not one we want to touch here. We’re more interested in how it all happens, with little reliance on IP.
The explanation mixes a bit of first-mover advantage with a bit of market power.
Many of the markets that together comprise “Wall Street” are dominated by an exclusive cohort of US investment giants and an equally exclusive group of foreign-based firms. These firms control large shares in particular lines of business, and, importantly, their clients can be “sticky.” Investment banking is driven by relationships, and many clients have long-term ties to their bankers that span a variety of product areas. As a result, even if innovations can freely be copied, a large bank can capture a lot of the return on its investment in innovation simply by virtue of its control over a large amount of the particular business at issue and its enduring client relationships.
Consistent with this, the leading innovators in most areas of the financial services industry have been the biggest firms. There appears to be a strong link between innovativeness and market share—large firms appear better placed to capture benefits from innovation, even in the face of copying.
And this leads to a broader point about why patents are rarely used for financial innovations: they do not seem to matter much to success in the market. Financial firms that introduce a new and unpatented type of security typically retain a dominant market share for several years, even though rival firms rapidly copy the innovation.
We’ll stop here, but there are a lot more industries to talk about in which copying and creativity mix quite nicely. Indeed, you can find a low-IP industry at your local bar – cocktail recipes, like food recipes, are uncopyrightable, and yet there is a lot of innovation in mixology. There are stories in The Knockoff Economy about many other such industries, from font design to magic to databases to open source software. We’ll write a bit about some of these tomorrow. And we’ll also be responding to some of your comments.