Role of Inequity Perception on Counterfeiting Strategy of Retailer

Abstract

Counterfeiting is a widespread phenomenon across various sectors ranging from aerospace components to software products. Retailers often cite manufacturer taking exorbitant margins as a reason for indulging in counterfeiting. In this problem, we attempt to understand retailer counterfeiting through a behavioral lens. We try to comprehend role of inequity perception of the retailer in his/her counterfeiting decision. We analyze counterfeiting from a supply chain perspective where a monopolist manufacturer has to deal with authorized retailer selling counterfeit goods. We use the Fehr and Schmidt inequity model to capture the utility of counterfeiting retailer. Our results demonstrate that if the manufacturer tries to charge high margins beyond a threshold limit the retailer tends to retaliate by increasing the market price and indulging in more counterfeiting. We evaluate the optimal pricing strategy the manufacturer should adopt based on advantageous and disadvantageous inequality and retailer perception of fair share. The results are further compared with model where the retailer objective is only profit maximization. We show that if the retailer has high advantageous and disadvantageous inequality and his perception of fair share is below a threshold value, the manufacture can set a wholesale price at which both players have better payoff than profit maximization case.