Deceptive Consumption of Counterfeits and Vertical Product Line Extension under Regulation

Consumers may purchase counterfeits from non-deceptive counterfeiters instead of genuine products from an authentic firm. This is especially true given that consumption of counterfeits can be deceptive as it is difficult to tell counterfeits apart from authentic products for consumers based on the similar product appearance. To cope with the non-deceptive counterfeiters, one of the strategies for the authentic firm is to engage in vertical product line extension by additionally introducing a new upgraded (high-quality) product such that the non-deceptive counterfeiters are unable to copy the new product within a certain period. Selling counterfeits is subject to a penalty imposed by regulators. We develop a game theoretical model to study the business implications of such deceptive consumption of counterfeits and vertical product line extension under regulation. We find that the authentic firm's profit first decreases and then increases with the penalty. Moreover, both the price and demand of the authentic firm's new product are higher with lower penalty. In addition, we also show that a higher appearance similarity between the genuine products and counterfeits may benefit the authentic firm under weak regulation. Last, the authentic firm may earn more when counterfeits are of higher quality if the penalty is low.To get more news about china industry research centers, you can visit acem.sjtu.edu.cn official website.
Yuetao Gao is an Assistant Professor of Marketing at School of Management of Xiamen University. He holds a Ph.D. in Marketing from National University of Singapore. His main research interest lies in strategic uncertainty in the sales and consumption of counterfeits. His work has appeared in Marketing Science.