ON THE LONG-RUN EFFECTS OF FASHION

"Fashion changes, but, should a fashion last for even a moderate length of time, so strong is the principle of inheritance, that some effect will probably be impressed on the breed." Darwin, C. (1883) "The Variation of Animals and Plants under Domestication," p. 231. I. INTRODUCTION Fashion is thought as the tendency of consumers to prefer a variety, design, or brand of a good though it cannot be ranked higher than others in any intrinsically useful dimension. In natural sciences, Darwin's observations suggest that fashion can have dramatic, long-lasting effects. When revisited in the context of the industrial society, these observations inspire two questions: how does fashion influence the evolution of a product and how does this evolution feed back on the role of fashion? Moreover, can the effects of fashion explain why some fashionable varieties survive while others lose popularity when fashion changes? In this article, we take a step toward answering these questions. We examine the dynamic interaction between fashion and industry structure and how this interaction affects the relevance of fashion in the market for a product in the different stages of its life. In our economy, firms have two observable characteristics: the quality of their production and the prestige of their variety (brand). Both quality and prestige can take a high or a low value. Consistent with Darwin's observations, we assume that agents derive utility from quality but no direct or indirect benefit from prestigious varieties. We interpret fashion as a "norm" such that when consumers choose between two varieties with the same quality but different prestige, they opt for the most prestigious one. In other words, in our economy fashion is synonymous of brand loyalty, that is, the systematic tendency of consumers to be loyal to a variety or brand. We analyze how fashion affects firms' decisions in the merger market. By influencing firm mergers, fashion affects the evolution of the industry structure, meant in our context as the distribution of characteristics across firms. In turn, the evolution of the industry structure feeds back on the relevance of fashion. Intuitively, fashion lacks any intrinsic content and is only a norm for choosing among varieties or brands with the same quality. As such, its relevance changes as the set of consumption possibilities evolves with the industry structure. The way fashion affects firm mergers is the following. A fashionable low-quality firm and an unfashionable high-quality one have the incentive to merge with each other. Intuitively, a low-quality firm benefits from merging with a high-quality firm because it participates to the current profits deriving from high-quality production. In turn, a high-quality unfashionable firm knows that if it faces the competition of a high-quality fashionable firm it will not be chosen by consumers. If this probability is high enough, that is, if the share of high-quality fashionable firms is large enough, this firm will prefer merging and foregoing part of its current profits. By merging with a fashionable firm, in fact, it will potentially gain prestige and will overcome competition. Moreover, whenever such a merger occurs, with some probability the firm generated by the merger inherits both a high (low) prestige and a high (low) quality of production. Therefore, over time the merging process induced by fashion modifies the distribution of attributes (industry structure), which, in turn, feeds back on the relevance of fashion. We characterize the dynamics of (the relevance of) fashion in two cases. In a first more general case, we allow firms' prestige to decay at an exogenous rate. In this case, the dynamics of fashion is driven jointly by firm mergers and by the decay of prestige. The dynamics turns out to be potentially quite rich: though fashion loses relevance in the long run, for some values of the rate of decay, it can exhibit periods of rising importance followed by periods of declining importance. …