Consumer Status Signaling, Wealth Inequality and Non-deceptive Counterfeits

Abstract

Problem definition: Consumers often enjoy displaying luxury consumption to signal their private wealth status. The emergence of social media has fueled such desire for status signaling. Meanwhile, the rising of e-commerce has made it easy for consumers to search and purchase cheap non-deceptive counterfeits to send a ``deceptive'' status signal, posing a new challenge to the luxury (status product) industry. Methodology/results: Motivated by these industry dynamics, we consider a market entry deterrence game between an incumbent status product firm (the firm) and a non-deceptive counterfeiter (the counterfeiter) who attempts to enter the market. A salient feature of our model is that the market demand is endogenously determined by a consumer status signaling subgame. Our analysis yields four main insights. First, we show that without counterfeits, the firm is strictly better off from the heightened motive of consumer status signaling; however, such benefit would be neutralized by the potential counterfeiter entry. Second, we find that the presence of counterfeits lowers the firm's profit, but may induce the firm to raise its price. Third, we show that the presence of counterfeits has mixed effects on social welfare; only when the wealth inequality among consumers is moderate, will the social welfare increase. Fourth, we demonstrate that increasing the counterfeiter market entry cost does not necessarily improve social welfare despite that it can help eradicate counterfeiters on the market. Managerial implications: Our analysis shows that status signaling and wealth inequality are the key drivers of the strategic interactions between the firm and the counterfeiter as well as the social welfare outcome. The findings from our analysis offer some initial guidelines to managers of luxury brands and e-commerce platforms in addressing the non-deceptive counterfeit problem.

Keywords: Consumer status signaling, non-deceptive counterfeits, pricing, entry, deterrence, social welfare

JEL Classification: C70, D21, L10,