Strategic blockchain adoption to deter deceptive counterfeiters

Counterfeiting is an ever growing problem worldwide which is exacerbated by the ease of access through e-commerce and online shopping. This calls for innovative technologies, such as blockchain, to identify, track, and prevent fake products from reaching consumers, especially for vital sectors such as the drug industry, which is the main motivation for this work. We investigate the strategic implications of using blockchain technology to deter counterfeiters. We particularly focus on the case of deceptive counterfeits that infiltrate legitimate distribution channels. Deceptive counterfeits lack the quality of genuine products and may pose immense health and safety risks to consumers who are unable to distinguish them from genuine products at the time of purchase. In contrast to prior literature that assumes that blockchain eliminates deceptive counterfeiting, we present a model that realistically considers blockchain as a technology that increases the capability of detecting counterfeits. This capability nonetheless comes at an increasing cost that may financially discourage genuine manufacturers from adopting the technology. The presented model shows that blockchain is not always financially beneficial and demonstrates that manufacturers can strategically balance between product quality and investment in blockchain to combat counterfeiting. Furthermore, our results demonstrate that, with the availability of blockchain, genuine manufacturers may be less interested to differentiate products based on quality, but rather rely on blockchain to block counterfeits.