Counterfeiters: Foes or Friends?

Abstract:     
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 of branded products of various quality levels. I collect new product-line-level panel data from Chinese shoe companies from 1993 to 2004. I identify heterogeneous effects of counterfeit entry on sales of authentic products of three quality tiers. In particular, counterfeits have both advertising effects for a brand and substitution effects for authentic products, and the effects linger for a few years. 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 high-fashion products (such as women’s high-leg boots) and for high-end products of brands that were not yet well-known at the time of the entry by counterfeiters. Analogous heterogeneous effects of counterfeiting on consumer purchase intent for branded products of three quality tiers are also discovered in lab experiments. I propose a theoretical framework to explain and generalize the findings.

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Number of Pages in PDF File: 45

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