Counterfeiting, which is defined as illegally copying genuine goods with a brand name, is a widespread phenomenon and is imposing a huge cost on owners of trademarks. Yet, consuming counterfeit products is not prosecuted in the UK, whereas it is in Europe or in the USA. Why is it so? In this paper, we look at how the entry of a counterfeiter affects the legal firm's pricing and advertising strategies and profits. The rationale for focusing on price and advertising is in fact straightforward. First, it is probably the high margin, that is, the difference between the price and the (comparatively very low) production cost that makes counterfeiting financially attractive. Second, the high willingness-to-pay by consumers is driven by the brand image or reputation, and this asset is notably built through advertising. Third, public enforcement of property rights is often lax and not all legal firms can afford private enforcement policies. In a nutshell, our results are as follows: First, we obtain that counterfeiting affects negatively pricing and advertising strategies before and after entry occurs. Second, we show that under no circumstances counterfeiting can be welcomed by a legal firm, that is, for all parameter values, counterfeiting reduces the profits of the owner of the genuine product. Finally, however, we show that there are circumstances under which consumer benefits from this illegal trade (the decrease in the price of the genuine good compensates the decrease in the brand reputation of this good). Such a result can rationalize non fining consumers of fake products.
Published August 2017 , 33 pages