Piracy versus Monopoly in the Market for Conspicuous Consumption

When luxury purchases signal the incomes of buyers, a monopoly will deliver signals efficiently. If in contrast competitors sell counterfeit copies of luxury goods at low prices, consumers will have to buy larger quantities or higher qualities to transmit the same signals, which wastes resources. Competition does maximal harm when entrants produce indistinguishable replicas of existing luxury goods since prices will fall the furthest. The choice of which goods should deliver signals presents a trade†off: goods with a large gap between marginal cost and the price a monopoly would charge signal efficiently but those large gaps increase the reward to counterfeiting.