Combating Counterfeit Products: Anti-counterfeiting Technology and Law Enforcement

Abstract

Counterfeits cause tremendous damages to brand companies by eroding their market shares and reducing customers’ buying motives. In response to such damages, many companies choose to develop and deploy anti-counterfeiting technologies, thus preventing counterfeiters from imitating their products. The companies can also rely on law enforcement exerted by local regulatory authorities to outlaw counterfeits. In this article, we study how brand companies may leverage the two approaches effectively. Specifically, we consider an authentic company that sells its products to a market that is administered by its regulatory authority. A counterfeiter exists in the market and may imitate the product offered by the authentic company. To combat counterfeiting, the authentic company may invest in anti-counterfeiting technology with uncertain outcomes, aiming to help customers effectively distinguish between genuine and fake products. We show that an increase in the authentic company’s anti-counterfeiting capability does not necessarily yield a higher profit. We also find that, in equilibrium, the anti-counterfeiting effort exerted by the authentic company does not necessarily decrease with the penalty levied by the authority, even though they serve the same purpose. Our analysis further highlights the importance of coupling law enforcement type with anti-counterfeiting capability in the cooperation with the regularity authority. Specifically, when having a high (low, respectively) anti-counterfeiting capability, the authentic company should promote a cooperation that focuses on preventive (corrective, respectively) law enforcement.

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