The Role of Anticounterfeit Technology in Combating Counterfeit Products

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Counterfeits cause tremendous damages to brand companies by eroding market shares and reducing customers' willingness to pay. Realizing such problem, many brand companies develop and deploy anticounterfeit technologies to prevent counterfeiters from imitating their products. In this paper, we consider an authentic company which sells its product to a market where a counterfeiter may imitate the genuine one. To combat counterfeiting, the authentic company develops its anticounterfeit technology, helping customers distinguish its genuine product from the fake. We find that in the presence of counterfeiting activities, an authentic company may choose to offer, from its spectrum of product qualities, a relatively low product quality or a very high quality, but not some quality level in-between. Our analysis further indicates that, in equilibrium, the anticounterfeit effort exerted by the authentic company does not necessarily decrease in the penalty levied by the authority, even though they serve the same purpose. In addition, we explore two possible measures that may help increase the authentic company's profit. The first is committing itself to anticounterfeit effort and the second is proactive cooperation with regulatory authority. We find committing to anticounterfeit effort can always make the authentic company better off but may increase the occurrence of counterfeiting. On the contrary, proactive cooperation with the regulatory authority can help reduce counterfeiting but may decrease the authentic company's profit as well.