Is Counterfeiting Good for Business?

28 February 2011 at 3:31 pm 3 comments

| Peter Klein |

Sometimes, according to Yi Qian in a new NBER Working Paper, “Counterfeiters: Foes or Friends?” In some cases, counterfeiting constitutes advertising that increases sales of the original product. It makes sense; how many buyers of faux Rolex watches or Gucci purses would have bought the authentic items if the fakes were banned? I suppose there’s a negative externality (more fakes means less exclusivity means a lower equilibrium price) that must be taken into account as well. An interesting analysis, in any case. Applications to digital media are left as an exercise for the reader.

Counterfeiters: Foes or Friends?
Yi Qian
NBER Working Paper No. 16785
Issued in February 2011

This paper combines a natural policy experiment and randomized lab experiments to estimate the differential impacts of counterfeiting on the sales and purchase intent of branded products of various quality levels. I collect new product-line level panel data from Chinese shoe companies from 1993-2004. Exploiting the discontinuity of government enforcement efforts for the footwear sector in 1995 and the differences in authentic companies’ relationships with the government, I identify heterogeneous effects of counterfeit entry on sales of authentic products of three quality tiers. In particular, counterfeits have both advertising effects for the brand and substitution effects for authentic products. The advertising effect dominates substitution effect for high-end authentic product sales, and the substitution effect outweighs advertising effect for low-end product sales. The positive effect of counterfeits is most pronounced for the high-fashion products (such as women’s high-leg boots) and for the high-end shoes of the brands that were not yet well-known at the time of the entry by counterfeiters. I provide a theoretical framework to generalize such impacts due to counterfeits. Analogous heterogeneous effects of counterfeiting on consumer purchase intent for branded products of three quality tiers are also discovered in lab experiments. Responses in the lab allude to the fact that counterfeits could increase brand awareness as well as steal business.

Entry filed under: - Klein -, Public Policy / Political Economy, Recommended Reading, Strategic Management. Tags: .

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3 Comments Add your own

  • 1. Michael E. Marotta  |  28 February 2011 at 7:37 pm

    (4 down and 61 pages to read, but I will comment anyway…)

    On the TED Talks is a presentation from Johanna Blakley, “Lessons from fashion’s free culture.” The bottom line is that unprotected markets have sales three orders of magnitude greater than markets with strong Intellectual Property rights.

    That said, counterfeit money does not have a salutary affect. Also, as a numismatist, I assure you that the massive influx from China of fake collectible US coins – and even counterfeits of certifications – has all but destroyed the markets for Seated Liberty Dollars, Trade Dollars, and other paradigmatic artifacts of American economic history.

    Johanna Blakley makes the point (as does Yi Qian) that the markets for knock-offs are not the same as those for the originals. “Brands with less government protection seek
    to differentiate their products by moving up the quality ladder. Over time, these branded companies shift toward the higher-end product lines and shrink their low-end product line.” – Qian.

    The problem, of course, is when differentiation is impossible and commerce is fouled. As Qian admits early on, such phonies can result in death, as real people – not abstract markets – are poisoned by fraudulent foods.

    This also impacts questions of plargiarism, of course. My ability to find a job teaching might be improved if more work from Peter Klein were creatively relabeled to Mike Marotta. In point of fact, using Copyscape, I actually found myself plagiarized by an undergraduate. I contacted the academic institution and offered my services, but they ignored the request and only punished the perpetrator. This was one of many reasons why as a criminologist, I oppose retributive justice: no one profits.

  • [...] Is Counterfeiting Good for Business? – via Organization & Markets – In some cases, counterfeiting constitutes advertising that increases sales of the original product. It makes sense; how many buyers of faux Rolex watches or Gucci purses would have bought the authentic items if the fakes were banned? I suppose there’s a negative externality (more fakes means less exclusivity means a lower equilibrium price) that must be taken into account as well. An interesting analysis, in any case. Applications to digital media are left as an exercise for the reader. [...]

  • 3. David  |  6 March 2011 at 1:47 pm

    I guess one question might be whether the presence of fakes increases or decreases the status value of the goods being counterfeited.

    Another question might be: if counterfeiting really is in the interests of the producers of the real thing, then where is the evidence that they tacitly (or otherwise) encourage “counterfeiting”? Presumably, market forces would provide an incentive to do just that.

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