The strategy of raising counterfeiters’ costs in luxury markets

Abstract

A luxury monopolist can prefer increasing its net profits by raising the costs of a competitive fringe of counterfeiters compared to a situation where it can completely drive them out of the market. The mechanism underpinning this outcome results from the fact that counterfeiters can generate net revenues for the luxury monopolist because (1) sanctions imposed to counterfeiters are shaped and pocketed by the luxury monopolist under cover of deterrence (2) costs and profit loss due to counterfeiters and incurred by the luxury monopolist can be less than what is usually assumed. Moreover, the presence of counterfeits can be considered as promotional devices that signal the true luxury cachet, increases the snob value of the counterfeited brand and rewards high-end designers in a non-monetary way. In short, counterfeiting is like the light of the sun: it can burn the genuine firm but living without can be more harmful for the genuine firm.

Appendix

The sign of ${\frac{{\partial \hat{f}}}{\partial \alpha }} = {\frac{{(1 - \phi )[(2 - \phi )\alpha^{2} - 4\alpha + 2]}}{{\phi [2(1 - \alpha ) + \alpha \phi ]^{2} }}}$ is the same then the sign of polynomial $P(\alpha ) = (2 - \phi )\alpha^{2} - 4\alpha + 2$. as $\Updelta^{\prime } = 2\phi$ then $\mathop \alpha \nolimits_{1} = {\frac{{2 - \sqrt {2\phi } }}{2 - \phi }}$ and $\mathop \alpha \nolimits_{2} = {\frac{{2 + \sqrt {2\phi } }}{2 - \phi }}$ as $0 < \phi < 1$, then $0 < \alpha_{1} < 1$ and $\alpha_{2} > 1$.

 

α	0	α1	1
Sign of P(α)	+	0	−