Why Branded Firm may Benefit from Counterfeit Competition

Ding, Yucheng (2014): Why Branded Firm may Benefit from Counterfeit Competition.

Abstract

A durable good monopolist sells its branded product over two periods. In period 2, when there is entry of a counterfeiter, the branded firm may charge a high price to signal its quality. Counterfeit competition thus enables the branded firm to commit to high future price in period 2, alleviating the classic time-inconsistency problem under durable good monopoly. This can increase the branded firm's profit by encouraging consumer purchase without delay, despite the revenue loss to the counterfeiter. Total welfare can also increase, because early purchase eliminates delay cost and consumers enjoy the good for both periods.

• Item Type: MPRA Paper
• Language: English
• Keywords: Counterfeits, Coase Conjecture, Quality Signaling
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets

References

[1] K. Bagwell and G. Ramey. Oligopoly limit pricing. The RAND Journal of Economics, pages 155-172,1991.

[2] P. Belleamme. Pricing information goods in the presence of copying. U of London Queen Mary Economics Working Paper, (463), 2002.

[3] H. Bester and J. Demuth. Signalling rivalry and quality uncertainty in a duopoly. 2013.

[4] P. Bontems, V. Meunier, and K. Universitet. Advertising and price signaling of quality in a duopoly with endogenous locations. Institute of Economics, University of Copenhagen, 2005.

[5] J. I. Bulow. Durable-goods monopolists. The Journal of Political Economy, pages 314-332, 1982.

[6] D. A. Butz. Durable-good monopoly and best-price provisions. The American Economic Review, pages 1062-1076, 1990.

[7] Y. Chen and M. H. Riordan. Price-increasing competition. The RAND Journal of Economics, 39(4):1042-1058, 2008.

[8] R. H. Coase. Durability and monopoly. JL & Econ.,15:143, 1972.

[9] R. J. Deneckere and R. Preston McAfee. Damaged goods. Journal of Economics & Management Strategy, 5(2):149-174, 1996.

[10] C. Fluet and P. G. Garella. Advertising and prices as signals of quality in a regime of price rivalry. International Journal of Industrial Organization, 20(7):907-930, 2002.

[11] X. Gabaix, D. Laibson, and H. Li. Extreme value theory and the effects of competition on profits. Massachusetts Institute of Technology, Working Paper, 2005.

[12] G. M. Grossman and C. Shapiro. Counterfeit-product trade, 1988.

[13] J.-H. Hahn. Damaged durable goods. The RAND Journal of Economics, 37(1):121-133, 2006.

[14] M. N. Hertzendorf and P. B. Overgaard. Price competition and advertising signals: Signaling by competing senders. Journal of Economics & Management Strategy, 10(4):621-662, 2001.

[15] W. R. Johnson. The economics of copying. The Journal of Political Economy, 93(1):158-174, 1985.

[16] L. S. Karp and J. M. Perloff. The optimal suppression of a low-cost technology by a durable-good monopoly. The RAND Journal of Economics, pages 346-364, 1996.

[17] K.-U. Kuhn and A. J. Padilla. Product line decisions and the coase conjecture. The RAND Journal of Economics, pages 391-414, 1996.

[18] Y. Qian. Impacts of entry by counterfeiters. The Quarterly Journal of Economics, 123(4):1577-1609, 2008.

[19] Y. Qian. Counterfeiters: Foes or friends? Technical report, National Bureau of Economic Research, 2011.

[20] Y. Qian. Brand management and strategies against counterfeits. Technical report, National Bureau of Economic Research, 2012.

[21] R. Thomadsen. Product positioning and competition: The role of location in the fast food industry. Marketing Science, 26(6):792-804, 2007.

[22] R. Thomadsen, A. Pagal, and D. Soberman. Location choice and profit-increasing entry. Technical report, working paper, 2012.

[23] J. Tirole. The Theory of Industrial Organization: Jean Tirole. MIT press, 1988.

[24] Y. Yehezkel. Signaling quality in an oligopoly when some consumers are informed. Journal of Economics & Management Strategy, 17(4):937-972, 2008.