Quantitative Marketing and Economics 2009

This paper uses a natural experiment to estimate the differential impacts of counterfeiting on the sales of branded products of various quality levels under weak intellectual property rights. I collect new productline level panel data from Chinese shoe companies from 19932004. Exploiting the discontinuity of government enforcement efforts for the footwear sector in 1995 and the differences in authentic companies’ relationships with the government, I identify heterogeneous effects of counterfeit entry on sales of authentic products of four quality levels. In particular, counterfeits have both advertising effects for the brand and substitution effects for authentic products. The advertising effect dominates substitution effect for high-end authentic product sales, and the substitution effect outweighs advertising effect for low-end product sales. I build a theoretical model with multi-product producers to generalize such impacts due to counterfeits. The aforementioned heterogeneous effects of counterfeits on branded products are also discovered in lab experiments where the presence of counterfeits is randomly assigned to a subsample of respondents. Responses allude to counterfeit’s functions in increasing brand awareness and affinity, as well as stealing demand of lower-end shoes.