Untangling Searchable and Experiential Quality Responses to Counterfeits
AbstractIn 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.
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Date of creation: Feb 2013
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Find related papers by JEL classification:
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
- O34 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-16 (All new papers)
- NEP-COM-2013-02-16 (Industrial Competition)
- NEP-IPR-2013-02-16 (Intellectual Property Rights)
- NEP-LAW-2013-02-16 (Law & Economics)
- NEP-MKT-2013-02-16 (Marketing)
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