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Brand Management and Strategies Against Counterfeits

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  • Yi Qian

Abstract

In this paper I provide a theory for brand-protection strategies to reduce counterfeiting under weak intellectual property rights. My theoretical framework has general implications for endogenous sunk cost investments as a means of deterring counterfeiters. My model incorporates two layers of asymmetric information that counterfeits can incur: counterfeiters fooling consumers, and buyers of counterfeits fooling other consumers. Brands have a number of tools at their disposal to maintain a separating equilibrium in the face of counterfeits. One of the theoretical predictions of this study is that counterfeit entry induces incumbent brands to introduce new products. This helps to explain the innovation strategies that authentic firms employ in response to entry by counterfeiters in practice. Authentic prices rise if and only if the counterfeit quality is lower than a threshold level. In addition, the model demonstrates how authentic producers could invest in self-enforcement to increase counterfeiters' incentives to separate themselves from brands. Better channel management through company stores and other costly devices are forms of non-price signals and complement a company's own enforcements against counterfeits. These predictions are validated using unique panel data collected from Chinese shoe companies covering the years 1993-2004. Data further reveal that companies with worse relationships with the government invest more in various self-enforcement strategies, which are effective in reducing counterfeit sales, and that the set of strategies are complements rather than substitutes for each other.

Suggested Citation

  • Yi Qian, 2012. "Brand Management and Strategies Against Counterfeits," NBER Working Papers 17849, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17849
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    File URL: http://www.nber.org/papers/w17849.pdf
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    References listed on IDEAS

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    1. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
    2. Akaike, Hirotugu, 1981. "Likelihood of a model and information criteria," Journal of Econometrics, Elsevier, vol. 16(1), pages 3-14, May.
    3. Jaskold Gabszewicz, J. & Thisse, J. -F., 1980. "Entry (and exit) in a differentiated industry," Journal of Economic Theory, Elsevier, vol. 22(2), pages 327-338, April.
    4. Michael J. Mazzeo, 2002. "Product Choice and Oligopoly Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 221-242, Summer.
    5. Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
    6. Yi Qian, 2008. "Impacts of Entry by Counterfeiters," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1577-1609.
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    Cited by:

    1. Ma, Xingliang & Spielman, David J. & Nazli, Hina & Zambrano, Patricia & Zaidi, Fatima & Kouser, Shahzad, 2014. "Information efficiency in a lemons market: Evidence from Bt cotton seed market in Pakistan," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 175278, Agricultural and Applied Economics Association.
    2. Ding, Yucheng, 2014. "Why Branded Firm may Benefit from Counterfeit Competition," MPRA Paper 52933, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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