Laboratory markets in counterfeit goods: Hong Kong versus Las Vegas

Abstract

“Black markets” represent an extreme challenge to empirical researchers due to the almost insurmountable obstacle of obtaining high-quality data. The dearth of high-precision data precludes not only empirical analysis—including the quantification of various elasticities—but also the informed policy analysis that results from the integration of empirical results with government, market, and social institutions. We propose and conduct a controlled laboratory market in counterfeit goods on several groups of subjects in Hong Kong and Las Vegas. The data generated in the experiments are used to estimate a random-effects model of individual choice behavior. The main empirical findings are that subjects in Hong Kong are more likely to purchase the counterfeit good than are subjects in Las Vegas; the price and penalty elasticities are substantially larger (in absolute value) in Las Vegas than in Hong Kong; and that in both locations the price effects of legitimate and counterfeit goods are asymmetrical in the monetary price and expected penalty cost. An equal increase in the price of an authentic good and the expected penalty cost of a counterfeit good increases the probability that a consumer will purchase the authentic good.