image: This is Yi Qian, Sauder School of Business, University of British Columbia. view more
Credit: University of British Columbia
CATONSVILLE, MD, August 19, 2015 - Counterfeit products have the power to stimulate innovation in the fashion industry and benefit consumers, according to a new study published in Marketing Science, a journal of the Institute for Operations Research and the Management Sciences (INFORMS).
Untangling Searchable and Experiential Quality Responses to Counterfeiting is by Professors Yi Qian of the University of British Columbia Sauder School of Business; Qiang Gong of Wenlan School of Business, Zhongnan University of Economics and Law, China; and Yuxin Chen of New York University Shanghai.
The research investigates two questions: (1) how do brands react to counterfeits? and (2) what are effective means of enforcement against counterfeits?
The authors studied financial statements of 31 brands selling fashion leather and sports shoes in China over a 12-year period. During this time, counterfeit production surged due to a change in the government's enforcement policy.
Most observers assume that counterfeits are bad for producers of original genuine products. However, the authors find that such producers react to counterfeiting by using superior materials and better shoe designs, whereas no corresponding improvements occur for "knock-offs." The improvements focus primarily on better aesthetic appeal for consumers.
The study outlines scenarios where counterfeits in the market can stimulate authentic producers to improve aesthetics for high-income consumers and improve affordability for low-income consumers. In these cases, many consumers are, in fact, better off.
"Established companies don't sit idly by while they are copied shamelessly," Yi Qian says. "They react by improving their products to set themselves apart from their illegal competitors."
When counterfeiters fool too many customers, authentic brands step up their design game. The authentic producers make the most of their cost advantages to produce more highly differentiated goods from the counterfeits, which shoppers can easily identify as real. In fashion, this differentiation strategy can mean an increased investment in aesthetics. Consumers benefit from this strategy because part of their satisfaction derives from superior aesthetics.
This isn't good news for every sector:
"Improving appearance is good for the clothing industry but not the pharmaceutical industry," Yuxin Chen points out. "Consumers are worse off if counterfeiters force pharmaceutical companies to waste their resources on aesthetics rather than safety or effectiveness."
Qiang Gong adds, "In markets where aesthetics is unimportant, counterfeits can drive out authentic products."
This phenomenon is similar to what occurs in the used car market, when the proliferation of "lemons" prevents sellers of superior used cars from receiving a higher price for their product.
Intellectual property enforcement is seldom perfect, even in wealthy nations, the authors maintain. Their research suggests that policy-makers should take note of how counterfeiters may impact producers differently in different markets.
"Sometimes, it is efficient to leverage a private brand's information and incentives to self-differentiate from knock-offs through innovation. This, combined with government enforcement, could effectively combat counterfeits." Yi Qian says, "Even in the case of counterfeits, market can serve consumer welfare as an 'invisible hand,' to use Adam Smith's words."
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About ISMS
The authors of the study are members of the INFORMS Society for Marketing Science, a group of scholars focused on describing, explaining, and predicting market phenomena at the interface of firms and consumers. This press release was prepared by the authors with the assistance of Gerard J. Tellis, ISMS VP of External Affairs.
About INFORMS
INFORMS is the leading international association for professionals in analytics and operations research (O.R.). INFORMS advances research, and develops and promotes best practices in analytics and O.R. through collaboration, knowledge sharing, and professional development. INFORMS helps business, government, and other organization professionals make better decisions to drive value to their organizations and society. Our certification program (CAP®), highly cited publications, educational meetings and conferences, continuing education, industry and process focused networking communities, competitions, and recognition provide professionals with the knowledge and connections they need to achieve ever greater value for their organizations. Further information about INFORMS, analytics, and operations research is at http://www.informs.org or @informs.
Journal
Marketing Science