Combating Strategic Counterfeiters in Licit and Illicit Supply Chains

Abstract

Counterfeit goods are becoming more sophisticated, from shoes to infant milk powder to aircraft parts, creating problems for consumers, firms, and governments. By comparing two types of counterfeiters—deceptive, so infiltrating a licit (but complicit) distributor, or nondeceptive in an illicit channel—we provide insights into the impact of anticounterfeiting strategies on a brand-name company, a counterfeiter, and consumers. Our analysis highlights that the effectiveness of these strategies depends critically on whether a brand-name company faces a nondeceptive or deceptive counterfeiter. For example, by improving quality, the brand-name company can improve her expected profit against a nondeceptive counterfeiter when the counterfeiter steals an insignificant amount of brand value. However, the same strategy does not work well against the deceptive counterfeiter unless high quality facilitates the seizure of deceptive counterfeits significantly. Similarly, reducing price works well in combating the nondeceptive counterfeiter, but it could be ineffective against the deceptive counterfeiter. Moreover, the strategies that improve the profit of the brand-name company may benefit the counterfeiter inadvertently and even hurt consumer welfare. Therefore, firms and governments should carefully consider a trade-off among different objectives in implementing an anticounterfeiting strategy.