Combating Strategic Counterfeiters in Licit and Illicit Supply Chains

Counterfeit goods are becoming more sophisticated from shoes to infant milk powder and aircraft parts, creating problems for consumers, …rms, and governments. By comparing two types of counterfeiters deceptive, so in…ltrating a licit (but complicit) distributor, or non-deceptive in an illicit channel, we provide insights into the impact of anti-counterfeiting strategies on a brand-name company, a counterfeiter, and consumers. Our analysis highlights that the e¤ectiveness of these strategies depends critically on whether a brand-name company faces a non-deceptive or deceptive counterfeiter. For example, by improving quality, the brand-name company can improve her expected pro…t against a non-deceptive counterfeiter when the counterfeiter steals an insigni…cant amount of brand value. However, the same strategy does not work well against the deceptive counterfeiter unless high quality facilitates the seizure of deceptive counterfeits signi…cantly. Similarly, reducing price works well in combating the non-deceptive counterfeiter, but it could be ine¤ective against the deceptive counterfeiter. Moreover, the strategies that improve the pro…t of the brand-name company may bene…t the counterfeiter inadvertently and even hurt consumer welfare. Therefore, …rms and governments should carefully consider a trade-o¤ among di¤erent objectives in implementing an anti-counterfeiting strategy. Key words: Game Theory, Global Operations Management, Supply Chain Management 1 Introduction Trademarks, also called brands, represent the most valuable assets of many …rms, requiring signi…cant investment in research and development as well as years of e¤orts in maintaining high product quality and careful brand management. Famous global brands such as GE, Nike and Nestlé are popular because they o¤er a guarantee of quality, which is vital to consumers when they make purchasing decisions. For those goods for which the mere display of a particular brand confers prestige on their owners, such as luxury watches and fashion apparel, many consumers purchase branded goods to demonstrate that they are consumers of the particular brand. These intrinsic values of trademarks create incentives for counterfeiting.