Copycat alternatives to expensive luxury goods are usually high in resemblance but low in quality when compared to genuine brands, an NUS Business School study explains.

The study was led by Associate Professor Lim Wei Shi from the Department of Marketing, PhD student Ms Gao Yini from the Department of Decision Sciences at NUS Business School and Professor Chris Tang, University Distinguished Professor and Edward Carter Professor of Business Administration at the UCLA Anderson School of Management. It showed the impact of the entry of fakes into the marketplace and its implications on original products, as well as consumer welfare.

According to a report released by Global Financial Integrity, the market for copycat goods is huge. In their March 2017 report, the value of global trade in counterfeit and pirated goods is estimated to generate between US$923 billion to US$1.13 trillion annually1. Many firms in China and other developing countries are enabled to produce and sell imitation products because of efficient supply networks, inconsistent law enforcement and large underserved markets.

Methodology
Using a game-theoretic framework, the study by NUS Business School addressed the factors behind a copycat’s entry into the marketplace and the potential impact on the original’s price, consumer surplus and social welfare.

The research analysed how the resemblance and quality of fakes affect copycat entry and the impact on consumer surplus and social welfare over two time periods.

Based on their findings, the researchers suggested that:

  • Copycats with a high physical resemblance but low product quality are more likely to successfully enter the market
  • Regardless of actual entry of a copycat, the potential threat is sufficient to force luxury brands to lower the prices of their genuine goods
  • Although fakes in the marketplace offer the opportunity for consumers who would otherwise not be able to afford the product, the loss in social status from buyers of the genuine product can result in an overall loss in consumer surplus and social welfare when the quality of fakes is low.

“Fakes are usually of high resemblance but low quality because the impact on genuine brands is low and genuine brands ‘tolerate’ their presence. High-quality fakes run the risk of encroaching on the profits of genuine brands, thereby attracting their attention and resulting in calls for enforcement of anti-counterfeit measures, as we have seen in recent years,” said Assoc Prof Lim.