Untangling Searchable and Experiential Quality Responses to Counterfeits

32 Pages Posted: 9 Feb 2013 Last revised: 16 Oct 2014

Date Written: February 2013

Abstract

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.

Suggested Citation

Qian, Yi and Gong, Qiang and Chen, Yuxin, Untangling Searchable and Experiential Quality Responses to Counterfeits (February 2013). NBER Working Paper No. w18784. Available at SSRN: https://ssrn.com/abstract=2214253

Yi Qian (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Qiang Gong

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Yuxin Chen

Northwestern University - Department of Marketing ( email )

Kellogg School of Management
2001 Sheridan Rd.
Evanston, IL 60208
United States

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