Counterfeiters: Foes or Friends?

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Counterfeits ... steal demand from low-end authentic products, but [have] positive spillover effects for high-end authentic products.

In fiscal 2009, the U.S. Customs and Border Protection seized more than $260 million worth of counterfeit goods, with counterfeit footwear accounting for 40 percent of the total seizures. Counterfeit footwear has topped the seizure list of the customs service for four years. How does the existence of such counterfeits affect the sales of authentic products?

In Counterfeiters: Foes or Friends? (NBER Working Paper No. 16785), author Yi Qian analyzes product data from Chinese shoe companies over 1993-2004. She can study the impact of policy changes, such as the 1995 change in government enforcement efforts in monitoring footwear trademarks in China. That change had different effects on counterfeit entry for branded companies with varying degrees of closeness to the Chinese government.

Qian finds that counterfeits have positive advertising effects for the brand of shoes they copy. However, they have negative substitution effects for the authentic products, driving buyers away from the authentic shoe to the counterfeit one. For sales of high-end authentic products, the positive advertising effect dominates the substitution effect. For sales of low-end authentic products, the negative substitution effect outweighs the advertising effect. All of the effects last for a few years before leveling off. And, these different effects for different products reinforce incentives for authentic producers to innovate and to move upward in the quality portfolio. Finally, after the entry of counterfeiters, market shares for the higher quality products increase while those of the lower end products decline.

Qian tests these results by conducting some surveys and finds similar effects regarding the purchase intent of high-end, medium-end, and low-end branded products. Her subjects' responses suggest that counterfeits signal brand popularity, at least to some consumers. Counterfeits thus appear to steal demand from low-end authentic products, but their presence has positive spillover effects for high-end authentic products.

--Lester Picker