Counterfeiters: Foes or Friends? How Do Counterfeits Affect Different Product Quality Tiers?

Yi Qian

NBER Working Paper No. 16785
Issued in February 2011, Revised in September 2013
NBER Program(s):Industrial Organization, Productivity, Innovation, and Entrepreneurship

A key concern about counterfeits and weak intellectual property protection is that they may hamper innovation by displacing legitimate sales. This paper combines a natural policy experiment with randomized lab experiments to estimate the heterogeneous impacts of counterfeiting on the sales and consumer purchase intent related to branded products of various quality levels. I collect new product-line-level panel data (1993-2004) on Chinese shoe companies. I identify heterogeneous effects of counterfeit entry on sales of authentic products of three quality tiers, finding that counterfeits have both advertising effects for a brand and substitution effects for authentic products, additionally the effects linger for some years. The advertising effect dominates the substitution effect for high-end authentic-product sales, and the substitution effect outweighs the advertising effect for low-end product sales. The positive effect of counterfeits is most pronounced for high-fashion products (such as women's high-leg boots and dress shoes), for shoes tailored to young customers, and for high-end products of brands not yet well-known at the time of counterfeiter entry.

A non-technical summary of this paper is available in the July 2011 NBER Digest.  You can sign up to receive the NBER Digest by email.

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Document Object Identifier (DOI): 10.3386/w16785

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