Counterfeiters: Foes or Friends? How Counterfeits Affect Sales by Product Quality Tier

• Published in: Management science Vol. 60; no. 10; pp. 2381 - 2400
• Main Author: Qian, Yi
• Format: Journal Article
• Language: English
• Published: Linthicum INFORMS 01-10-2014; Institute for Operations Research and the Management Sciences
• Subjects: Advertising; Brand names; Brands; China; Computer services industry; Computer software industry; Consumer advertising; Consumer behaviour; Cost of sales; counterfeit; Counterfeiting; Enforcement; Fashion; File sharing; Footwear; Footwear industry; Impact analysis; Innovations; Intellectual property; Intellectual property law; intellectual property rights; International economic relations; Management science; Panel data; Product differentiation; Product lines; Product quality; Production costs; Research methodology; Sales; Sales management; Shoes & boots; Studies; Waste byproducts; Women; United States; China
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.2014.1932

A key concern about counterfeits and weak intellectual property protection is that they may hamper innovation by displacing legitimate sales. This paper combines a natural policy experiment with randomized lab experiments to estimate the heterogeneous impacts of counterfeiting on the sales and consumer purchase intent related to branded products of various quality levels. I collect new product-line-level panel data (1993-2004) on Chinese shoe companies. I identify heterogeneous effects of counterfeit entry on sales of authentic products of three quality tiers, finding that counterfeits have both advertising effects for a brand and substitution effects for authentic products, additionally the effects linger for some years. The advertising effect dominates the substitution effect for high-end authentic product sales, and the substitution effect outweighs the advertising effect for low-end product sales. The positive effect of counterfeits is most pronounced for high-fashion products (such as women's high-leg boots and dress shoes), shoes tailored to young customers, and high-end products of brands not yet well-known at the time of counterfeiter entry.
This paper was accepted by David Hsu, entrepreneurship and innovation.