Yi Qian, Assistant Professor of Marketing and Kraft Research Professor at Northwestern University's Kellogg School of Management, feels that counterfeiting can have both a positive as well as a negative rub-off effect on actual brands
China is undoubtedly the world’s biggest market for counterfeit products. From fake Louis Vuitton bags, to Prada purses, Adidas sweatpants, Nike sneakers and Rolex watches—you can buy them all for a song in huge multistoried markets across China’s cities. How does the prevalence of counterfeits impact brand owners? Should the likes of Gucci and Prada crack down on counterfeits?
Yi Qian, Assistant Professor of Marketing and Kraft Research Professor at Northwestern University’s Kellogg School of Management, has been studying the interplay of intellectual property rights (IPRs), brand value and counterfeiting for a while now. She feels that counterfeiting can have both a positive as well as a negative rub-off effect on actual brands. Her forthcoming research paper titled 'Counterfeiters: Foes or Friends' (Management Science) examines exactly that.
Excerpts from an interview held on the sidelines of the 2013 China-India Consumer Insights Conference co-organized by the CKGSB and Yale School of Management (Yale SOM):
Q. China is full of fake brands. What are some of the broad implications of a market like that?
A. There are many general implications. I look at the 4-P implications of counterfeiting on the market. ‘4-P’ refers to the four pillars in traditional marketing–product, price, promotion and place. What I found was when counterfeits enter the market, authentic brands have incentives to upgrade their quality and innovate. As a result their marginal costs and some other costs increase. They have to charge a higher price to recoup those costs as well as to signal a higher quality, so that consumers can differentiate counterfeits from the authentic products.
In terms of the third P, ‘promotion’, authentic products will engage in a lot of self-enforcement activities, including informed advertisement, vertical integration of their company stores, which partly links to the last P, ‘place’. So traditionally they have the products sold in a lot of the retail stores. (But) after they were infringed by counterfeits, they found it to be very effective to rent their company stores and display authentic certificates on the wall. (They) also collect different quality levels of products in this one store of their own so they could garner more control of their distribution channels. And in these leased company stores, they would have the employees to do more informed advertisement to consumers, to teach consumers how to differentiate the counterfeits from the authentic products.
In terms of the advertisement, there is also a de-promotion effect, for the counterfeiters. Companies like Nike, Adidas and a lot of these branded companies would have their own employees walk around the market and track down counterfeits and report to the government. Then they would collaborate with the government to outlaw these counterfeit localities. So this self-enforcement sort of de-advertises or de-promotes the counterfeiters. And of course the vertically integrated, licensed stores also de-promote counterfeits because counterfeiters have little incentive to imitate that strategy—otherwise they get identified very easily by the government.
Q. Right. You have been talking about the government enforcing intellectual property rights (IPR). But still you have places like the Silk Street Market in Beijing, where on the ground floor the big banners proclaim, ‘Don’t buy fakes, buy only branded products’, yet the whole market is full of fakes. Isn’t it contradictory that markets like that exist all over China? Is the government doing enough?
A. It’s a political question as well as a legal question. In fact, I found in my data that there was a sudden surge in counterfeiting from 1995 to 1996 and some following years. I looked into why that was the case, as well as interviewed the companies. I found out that it was largely due to an actual policy shift around that time because of a series of accidents that unexpectedly took place in seven safety sectors, such as food, drugs, gas, etc. These accidents were unexpected and caused a lot of safety hazards, so the government had to emergently reallocate resources away from the fashion industry to these industries to ensure that sub-quality products and counterfeits in these safety prone sectors were ruled out. As a result, the enforcement on trademark monitoring by the government in the fashion industry, shoes included, loosened significantly. And that leaves loopholes for counterfeits to enter.
And that creates a very nice, natural experiment for me. What I found was exactly that after this sudden surge of counterfeiting in the market, there were these 4-P reactions in the market. And I have several theory papers looking at welfare calibrations and it’s interesting because with the innovations authentic companies did with these different pricing strategies, some of the consequences were actually positive for the consumers. Of course, it really depends on the parameter values. There were also large areas of the parameter range where the welfare was detrimental. So it is a mixed bag, but one thing is clear—the collaboration between private sector and public enforcement could be most effective in the sense that we leverage both the companies’ expertise of product quality and authenticity and the government’s authority of tracking the counterfeits.
Q. Can you share an example of how this 4-P effect played out with a given brand?
[This article has been reproduced with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China's leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge.]