Complementarity in Public and Private Intellectual Property Enforcement; Implications for International Standards

Abstract

I examine the relationship between publicly provided enforcement of intellectual property (IP) rights and an authentic producer’s strategies to influence entry of non-deceptive counterfeit products. I consider investment in supplemental private IP enforcement through the legal system, as well as endogenous product quality. I show that when public IP enforcement is low, the authentic firm accommodates counterfeit entry by choosing low private enforcement and relatively high product quality. However, under high public enforcement, the firm deters entry through high private enforcement and a reduction in quality. This mechanism creates a non-monotonic relationship between public enforcement and social welfare, and incentivizes inefficiently low public enforcement. In this context, I show that international efforts to impose stricter legal penalties against counterfeiters can be counterproductive; further reducing public enforcement and increasing counterfeit prevalence. In contrast, minimum quality standards can be implemented to prevent quality reductions, incentivize higher public enforcement, and reduce inefficiency.