Counterfeit Product Essay Example

We analyze a two-country model of trade in both legitimate and counterfeit products. Domestic firms own trademarks and establish reputations for delivering high-quality products in a steady-state equilibrium. Foreign suppliers export legitimate low-quality merchandise and counterfeits of domestic brand-name goods. Heterogeneous home consumers either purchase low-quality imports or buy brand-name products, rationally expecting some degree of counterfeiting of the latter. We characterize a counterfeiting equilibrium and explore its properties. We describe the positive and normative effects of counterfeiting in comparison with a no-counterfeiting benchmark. Finally, we provide a welfare analysis of border inspection policy and of policy regarding the disposition of counterfeit goods that are confiscated at the border.
Grossman and Shapiro study international trade in counterfeit products. They develop a two—country, equilibrium model of counterfeiting, in which foreign firms produce legitimate, low—quality ( "generic") merchandise as well as forgeries of brand—name domestic products. The authors use their model to study the effects of counterfeiting on domestic consumers, domestic trademark owners, and on foreigners. They also provide a welfare analysis of border inspection policy and of policy regarding the disposition of counterfeit goods that are confiscated at the border.
Despite the importance of counterfeiting (which the authors document), the economics literature contains no models of counterfeit_product trade. Grossman and Shapiro partially correct for this omission by analyzing deceptive counterfeiting,
i.e., the sale of fakes that consumers cannot easily distinguish from genuine items. This type of counterfeiting must be analyzed as a problem in the economics of information. Counterfeiting thus involves the twin problems of imperfect information (by consumers) and imperfect property rights (for trademark owners).
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