How a luxury monopolist might benefit from the aspirational utility effect of counterfeiting?

Abstract

Thanks to an intertemporal analytical model, we incorporate aspirational consumers in Veblen markets for luxury fashion items. We show how a luxury monopolist can increase its profits thanks to the presence of counterfeit products. The genuine producer profit is shaped by two opposite effects: (1) a positive aspirational effect resulting from a sales increase due to the aspirational consumers who seek to imitate the lifestyle of snob consumers (2) a negative snob effect, resulting from a sales decrease due to the reduction of consumption by some snob consumers. We identify the conditions under which the overall effect generated by counterfeiting can increase the genuine firm profit. These conditions imply the existence of large aspirational effects and high additional utility gain associated with buying an original product instead of obtaining a counterfeit product.

Appendix

Proof of proposition

We show that, in the situation described in the paragraph 2, if consumers exist for both the original item and the counterfeit product, the firm always loses money. In fact, if both consumers exist, we must have $\hat{\theta }_{c} < \hat{\theta }_{g} < 1$, i.e., $\mathop p\nolimits_{c} < {\frac{\alpha (1 - \alpha )}{2 - \alpha }}$. The profit in the word with counterfeiting is lower than the profit in the world without counterfeiting if and only if: ${\frac{{(1 - \alpha + \mathop p\nolimits_{c} )^{2} }}{4(1 - \alpha )}} < \frac{1}{4}$, such an inequality is verified if $\mathop p\nolimits_{c} < \sqrt {1 - \alpha } (1 - \sqrt {1 - \alpha } )$. Comparing the two constraints on p _c we had: ${\frac{\alpha (1 - \alpha )}{2 - \alpha }} < \sqrt {1 - \alpha } (1 - \sqrt {1 - \alpha } )$, so we have always $\mathop \pi \nolimits_{g}^{c} < \mathop \pi \nolimits_{g}^{nc}$.