An economic analysis of the online counterfeit market and the impact of anti-counterfeit technology

Counterfeiting causes hundreds of billions dollars of losses around the world every year. Due to the growing prominence of online commerce, the seriousness of the situation could soon become much worse. Hence, reaching a clear understanding of the fundamental economic incentives behind this practice is of vital importance. In this paper, we investigate a problem within which a firm selling a counterfeit product engages in price competition with a firm that sells an authentic product to a population of heterogeneous consumers. An online intermediary acts as the facilitator of both firms' transactions and may consequently be liable for any counterfeit sales. We use a stylized model to explain the economic incentives and the equilibrium behaviors of both firms and of the intermediary. More specifically, we seek to understand the effects of anti-counterfeit technology and anti-counterfeit policies on both firms' pricing strategies and profits, as well as on the intermediary's profit, consumer surplus and social welfare. Conclusions of this paper can provide managerial implications on how to effectively handle the online counterfeit problem.