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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. In a second special case, we shut down the exogenous decay of prestige and focus only on the effects of firm mergers. We find that in this special case one of two scenarios realizes. Under some conditions, fashion leads firms' distribution to a polarized pattern in which firms whose varieties have high (low) prestige have also high (low)-quality production. In this scenario, fashion monotonically loses relevance over time until it has no longer a role when the prestige of a variety becomes perfectly, positively correlated with its quality. This result appears to be quite interesting as the decline of fashion occurs even without allowing for an exogenous decay of prestige. In a second scenario, instead, fashion does not affect the industry structure, that is, the distribution of firms is stationary. In this scenario, fashion preserves its relevance over time.

The remainder of the article is structured as follows. In the next section, we examine the related literature. In Section III, we lay out the model. Section IV solves for the equilibrium and presents the main results. Section V analyzes extensions and robustness checks: for example, in this section, we characterize conditions under which fashionable varieties survive fashion changes. In Section VI, we present anecdotal evidence in support of the model and its implications. Section VII concludes. Proofs are relegated to the Appendix.

II. RELATED LITERATURE

This article relates to two strands of literature. First, it relates to the studies on fashion and fashion cycles. Becker (1991) constructs a static model in which fashion is an exogenous consumption externality such that agents derive utility from consuming goods consumed by others. Matsuyama (1992) and Karni and Schmeidler (1990) analyze interactions between classes of consumers (respectively, conformists and nonconformists and lower and upper class) and show that these interactions can generate cyclical variations in the goods demanded. Pesendorfer (1995) constructs a matching model in which high-type agents search for other high types. Fashionable designs are a signal for identifying high-type agents. Pesendorfer (1995) derives a fashion cycle from changes in the production and pricing decision of the producers of fashionable designs and from the consequent change in the number of consumers who buy these designs.

Relative to these studies, we innovate in two dimensions. First, we focus on the interaction between fashion and the supply side of the economy rather than the demand side. Pesendorfer (1995) also focuses on the supply side but analyzes the impact of fashion on firms' production decisions given an exogenous market structure rather than the impact of fashion on the endogenous evolution of the industry structure. (2) Second, these models explain "fashion cycles," that is, how varieties (brands) that are initially prestigious become less fashionable and lose popularity. By contrary, we show that even when the relevance of fashion for a variety decreases, the popularity of the variety could not change or increase over time. This occurs because by influencing the industry structure, fashion affects the intrinsic properties of the variety, such as its quality. Therefore, in the long run, popularity can be a poor indicator of the relevance of fashion. Finally, it is worth mentioning that, relative to this literature, we also put forward a different notion of fashion. In the above studies, a fashionable good carries a direct or indirect advantage to consumers. In our economy, instead, fashion does not have any informational or signaling role for consumers but, consistent with Darwin's observations, is primitively defined as the loyalty to a brand or variety. Indeed, by interpreting fashion this way, we can abstract from the interaction among consumers on the demand side and focus on the interaction among firms on the supply side.

The second related strand of literature examines the interaction between social norms and economic behavior. The theoretical framework we use is close to that of Mailath and Postlewaite (2005) and Cole, Mailath, and Postlewaite (1992). Under the theoretical point of view, our article focuses on the way social norms affect the correlation between social and productive attributes. For example, we identify conditions under which, in a population of agents with two distinct attributes, a social, unproductive asset and a productive attribute, the social and the productive assets progressively cluster together.

III. MODEL

Consider an infinite horizon, discrete-time economy populated by a unit continuum of firms and a continuum of consumers of measure one half. Firms produce the unique consumption good at no cost. (3) Firms have two attributes, quality of production and prestige. If the good has varieties or designs, the prestige of a firm can refer to the variety or design produced by the firm. Alternatively, the prestige of a firm can refer to its brand. Production can be of high quality (H) or low quality (L). Analogously, firms are divided in two classes of prestige, fashionable (h) and unfashionable (1). (4) Both attributes are exogenously given in Period 0. Moreover, at the beginning of each period a fashionable firm becomes unfashionable (i.e., its prestige decays)with probability 1 - [delta] [member of] [0, 1]. Firms maximize their value as given by their stream of profits discounted at the market factor [beta].

ASSUMPTION 1 (Merger Market). There is a centralized market where in...

NOTE: All illustrations and photos have been removed from this article.



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