Choi, E. Kwan

Handbook of International Trade: Economic and Legal Analysis of Trade Policy and Institutions, Volume 2, Oxford, United Kingdom, (December 2005)

This paper investigates a mixed market in which one or more producers of genuine brands compete with firms that produce counterfeit goods. The counterfeit product is assumed to be a good with positive marginal utility. Consumers recognize a counterfeit but knowingly purchase it because of its low price. A Stackelberg-type leader is shown to reap a higher profit than a Nash-type monopolist. When duopolists of genuine brands compete for a larger market share, counterfeiters may actually help the brand they copy. Developing countries do not directly benefit from recognizing the intellectual property rights of developed economies and law enforcement is costly. Prosecution and elimination of counterfeiters may not be optimal. Instead, tolerance of registered counterfeiters may be socially desirable, especially when the trademark holder operates in a country where law enforcement is lax and by tradition intellectual property rights are not well defined.