Combating a Strategic Cross-Border Counterfeiter through a Public-Private Partnership

Li, Xishu and Pourakbar, Morteza (2020) Combating a Strategic Cross-Border Counterfeiter through a Public-Private Partnership. SSRN.

Abstract

Problem definition: We study how Customs and private enterprises can build a public-private partnership (PPP) to combat a strategic cross-border counterfeiter. Academic / Practical Relevance: Counterfeiting harms both legitimate businesses and consumers. Since counterfeits often invade a local market from foreign lands, Customs exerts a leading role in the fight deterring the entry of counterfeits. Efficient Customs deterrence activities depend on the collaboration with the intellectual property right holders. Our research provides guidance on the design characteristics of an effective anti-counterfeiting PPP. Methodology: We model the problem as a three-stage game with three players: Customs, a legitimate OEM, and a counterfeiter. Customs and the OEM devise their own efforts in a PPP, while the OEM also sets the price of the genuine product. The counterfeiter decides whether to enter the market as a deceptive or non-deceptive player upon entry. Results: Our results first show that when the penalty exceeds a certain threshold determined by the choices of Customs and the OEM, a PPP can deter counterfeits or, at a minimum, suppress deceptive counterfeiting. We also find that when the penalty on the counterfeiter is too low, a PPP actually amplifies the market share of a non-deceptive counterfeiter. Second, for deceptive counterfeits, a sufficiently high Customs inspection rate serves as the key for both Customs and the OEM to pursue a PPP. Combating non-deceptive counterfeits, however, requires a sufficiently high penalty. Third, in the scenario with no PPP, the OEM may use pricing to suppress deceptive counterfeiting where: (1) the functional quality of the counterfeit is poor or (2) deceptive counterfeiting becomes too rampant. Fourth, we detect a self-correcting mechanism in the absence of a PPP in terms of the quality of the counterfeit and the perceived proliferation of counterfeiting in the marketplace. Finally, we demonstrate conditions where a PPP can increase the expected consumer surplus. Managerial Implications: By scrutinizing conditions underlying an effective PPP, our results help explain why counterfeits have become inevitable in many industries despite multiple anti-counterfeiting PPP efforts, as well as why the participation rate of legitimate firms in current PPPs is low. We also show when a PPP leads to an undesired result and when it should thus be merged with other anti-counterfeiting strategies.