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Cloak or Flaunt? - The Firm's Fashion Dilemma

Often firms in the fashion industry purposefully withhold information on the identity of their most fashionable or acclaimed products. The benefit of this strategy is not obvious since we would expect higher awareness about fashion hits to increase demand. Moreover, even within the fashion industry, some firms actively promote their fashion hits. This divide in communication strategies cannot be explained by the existing wealth signaling models of fashion (Veblen 1899, Pesendorfer 1995). Thus, the main research question of this paper is: Why do some firms cloak fashion hits, while others flaunt them? I suggest that fashion is a social device that may facilitate social interactions by: 1) allowing consumers to signal to each other that they are “in the know,” and, 2) enabling them to fit in with their peers. I present a model of social interactions, where players use fashion goods to signal own type and interpret that of others. In this context, I examine how the firm’s communication strategy affects the value of fashion as a social device, and how this in turn affects firm’s incentive to cloak or flaunt fashion. The firm faces an interesting dilemma - if it reveals the identity of the fashion hit, then the signaling value of the product is diluted since most consumers can recognize and purchase it. However, if there is very little information in the market, its value is again undermined since there are fewer social interactions in which a consumer can use it as a signaling device. Given these trade-offs, I find the conditions under which the firm prefers to withhold information on the identity of its fashion hits. Interestingly, the firm is more likely to cloak fashion if a large fraction of its consumers are interested in using fashion as a social device. I also examine consumers’ and firm’s incentives to preserve exclusivity and find that they are not perfectly aligned. Finally, I find that social welfare can be enhanced when there is less information in the system.