Cloak or Flaunt? The Fashion Dilemma

There exists a dichotomy in the communication strategies of fashion firms--some firms purposefully cloak information on the tastefulness of their products, whereas others openly flaunt their tasteful or "it" products. This divide in communication strategies cannot be explained by existing wealth signaling models of fashion. In this paper, we offer a model of fashion that explains the above dichotomy. We model fashion as a social device that plays the dual role of allowing people to both fit in with their peers and differentiate themselves by signaling their good taste or access to information. In this context, we show that a fashion firm faces an interesting dilemma--if it restricts information, then only sophisticated consumers buy its products and use them to signal their taste. Cloaking thus preserves the signaling value of its products but reduces the number of social interactions enabled by them. In contrast, flaunting undermines the signaling value of its products but increases the interactions enabled by them. Given these trade-offs, we derive the conditions under which cloaking occurs. We also show that, in equilibrium, the most tasteful product endogenously emerges as the fashion hit or "it" product.