Anti-Counterfeiting in the Presence of Non-Deceptive Counterfeits with Vertical Differentiation

This paper studies the interaction between a genuine brand firm and a non-deceptive counterfeiter with endogenous quality and anti-counterfeiting effort decisions. We examine how such interaction affects the firms’ decisions and performances, consumers, and society in a vertical differentiation model. Our result suggests that more efficient quality improvement of the genuine product is not necessarily an effective anti-counterfeiting strategy because it may increase the counterfeiter’s performance. Besides, closer counterfeit imitation does not always hurt consumers, while more efficient anti-counterfeiting or heavier penalty may undermine the social welfare. Furthermore, with sufficiently cheap counterfeit imitation, social welfare increases when the genuine brand firm’s quality improvement becomes more efficient; otherwise, social welfare will decline if the brand firm’s quality improvement is more efficient. In contrast, social welfare always increases with lower penalty and less costly counterfeiter imitation. Finally, we conduct the robustnesss check of partial results of simultaneous and sequential pricing strategies and reveal the pattern of counterfeiting cost efficiency’s impact on profits and social welfare in both cases