Counterfeiters: Foes or Friends
Posted: 8 Nov 2010
Date Written: November 6, 2010
This paper combines a natural policy experiment and randomized lab experiments to estimate the differential impacts of counterfeiting on the sales and purchase intent of branded products of various quality levels. I collect new product-line level panel data from Chinese shoe companies from 1993-2004. Exploiting the discontinuity of government enforcement efforts for the footwear sector in 1995 and the differences in authentic companies' relationships with the government, I identify heterogeneous effects of counterfeit entry on sales of authentic products of three quality levels. In particular, counterfeits have both advertising effects for the brand and substitution effects for authentic products. The advertising effect dominates substitution effect for high-end authentic product sales, and the substitution effect outweighs advertising effect for low-end product sales. I build a theoretical model with multi-product producers to generalize such impacts due to counterfeits. The aforementioned heterogeneous effects of counterfeits on branded products are also discovered in lab experiments where the presence of counterfeits is randomly assigned to a subsample of respondents. Responses allude to the fact that counterfeits can increase brand awareness and affinity, as well as substitute for lower-end shoes.
Keywords: Counterfeit, Intellectual Property Rights, China, Instrumental Variables, Marketing Experiments, Sales and quality, Shoes
JEL Classification: O34, O31, K42
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