Untangling Searchable and Experiential Quality Responses to Counterfeits
In this paper, we untangle the searchable and experiential dimensions of quality responses to entry by counterfeiters in emerging markets with weak intellectual property rights. Our theoretical framework analyzes the market equilibria under competition with non-deceptive counterfeiting and deceptive counterfeiting, respectively, as well as under monopoly branding. A key theoretical prediction is that emerging markets can be self-corrective with respect to counterfeiting issues in the following sense: First, counterfeiters could earn positive profits by pooling with authentic brands only when consumers have good faith in the market (believe in a low probability that any product is a counterfeit). When the proportion of counterfeits in the market exceeds a cutoff value, brands would invest in self-differentiation from the competitive fringe counterfeiters. Second, to attain a separating equilibrium with counterfeiters, branded incumbents upgrade the searchable quality (e.g. appearance) of their products more and improve the experiential quality (e.g. functionality) less, as compared to monopoly equilibrium. This prediction uncovers the nature of product differentiation in the searchable dimension and helps in analyzing the real-world innovation strategies employed by authentic firms in response to entries by counterfeit entities. In addition, the welfare analyses hint at a non-linear relationship between social welfare and intellectual property enforcement.
Yi Qian is Assistant Professor of Marketing and Yuxin Chen is the Polks Bros. Professor in Retailing, both at the Kellogg School of Management at Northwestern University, 2001 Sheridan Road, Evanston, IL 60208. Qiang Gong is Associate Professor at the Southwestern University of Finance and Economics, Guanghua Building, 55 Guanghuacun Road, Chengdu, Sichuan Province, P.R.China. Please send correspondences to email@example.com, (847)491-7113. The authors are grateful to Philippe Aghion, Eric Anderson, Kevin Bryan, Richard Caves, Anne Coughlan, Josh Lerner, Debu Purohit, Jagmohan Raju, K. Sudhir, and Miguel Villas-Boas for helpful advice and comments. Yi also gratefully acknowledges co-operation from the Chinese Quality and Technology Supervision Bureau (QTSB) and the companies she interviewed and surveyed. The results in this paper do not necessarily represent the views of QTSB or the views of the National Bureau of Economic Research.
I have already included anything relevant in ackknowledgements. Thanks!