Is Counterfeiting Good for Business?
| 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?
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.