Converting Counterfeiters in Emerging Markets to Authorized Suppliers: A New Anti-Counterfeiting Measure

Authors:
Dr. Liling Lu, Whitman School of Management, Syracuse University, 
Dr. Xin Fang, Lee Kong Chian School of Business, Singapore Management University,
Dr. Sarah Yini Gao, Lee Kong Chian School of Business, Singapore Management University, and
Dr. Burak Kazaz, Whitman School of Management, Syracuse University


Journal:
Production and Operations Management (accepted in December 2024)


Summary:
Motivated by high-quality fake producers in Grand Bazaar in Turkiye and in Putian region of China, this study identifies the conditions under which counterfeiters can be converted to licit suppliers, contributing to the literature on socially-responsible operations and supply chain management.


Research Questions:
Our forthcoming publication studies the following three questions: 

[1] Considering the option of converting a counterfeiter to an authorized overseas supplier, what is the equilibrium sourcing strategy (e.g., single sourcing from home supplier, single sourcing from overseas supplier, dual sourcing) for a brand-name firm? Under what conditions is the counterfeiter willing to be authorized as an overseas supplier?

[2] Under what conditions would a counterfeiter cease selling counterfeits upon becoming an authorized overseas supplier? Specifically, which sourcing strategy effectively mitigates the risk of counterfeiting?

[3] Does converting the counterfeiter to an authorized overseas supplier benefit consumers or society?


What We Know:
Counterfeits are illegal products that imitate and infringe on the brands of genuine items. Globalization has significantly expanded the range of products being counterfeited, extending from luxury goods (e.g., fashion apparel and watches) to other consumer products (e.g., electronics and stationery). According to the Organization for Economic Cooperation and Development (OECD), in 2019 alone, imports of fake products into the European Union (EU) increased to 6.8% of all imports, and globally, the value of counterfeit and pirated merchandise reached $509 billion, representing about 3.3% of world trade. 

In recent years, "super fakes," i.e., high-quality counterfeits, have gained popularity. The ability of super fake manufacturers to produce high-quality products has inspired a novel anti-counterfeiting measure: converting counterfeiters to authorized suppliers.

We develop a game-theoretic model to examine the interactions between a brand-name firm with a licit home supplier and a counterfeiter who can be potentially converted to an authorized overseas supplier. Our analysis leads to three main results. 

First, the brand-name firm can convert the counterfeiter to a licit supplier through either dual sourcing or single sourcing when the cost differential between two suppliers is moderate to high, or the quality perception differential between brand-name products produced by two suppliers is low. However, this conversion does not necessarily prevent counterfeiting unless the penalty from law enforcement is stringent. Our paper recommends that brand-name firms strategically use their wholesale pricing and sourcing decisions to establish socially responsible supply chain operations and prevent counterfeiting. 

Second, while dual sourcing is known for its risk diversification, our study identifies another benefit previously not reported in the literature: mitigating counterfeit risks. Dual sourcing can be more effective than single sourcing as the quality perception of super fakes approaches that of brand-name products, and its effectiveness becomes more pronounced when the brand-name firm offers wholesale price contracts in a sequential order. Conversely, single sourcing is preferable under conditions of high cost differential and low quality perception differential. 

Lastly, converting counterfeiters to authorized suppliers can reduce consumer surplus and does not improve social surplus unless authorities enforce high penalties on counterfeiters or the cost differential between two suppliers is substantial.


Novel Findings:
In recent years, "super fakes," i.e., high-quality counterfeits, have gained popularity. The ability of super fake manufacturers to produce high-quality products has inspired a novel anti-counterfeiting measure: converting counterfeiters to authorized suppliers.


Implications for Practice:
This study shows that brand-name firms do not have to rely on authorities to enforce significant penalties on counterfeiters. Rather, brand-name firms can offer higher wholesale price contracts to overseas suppliers to convert (former) counterfeiters to authorized suppliers and prevent them from further counterfeiting. 

Our novel conversion idea is a new form of coopetition in which a counterfeiter is converted to a licit supplier.


Implications for Policy:
From a policy perspective, authorities can recommend powerful brand-name firms to consider adjusting their wholesale-price contracts to incentivize potential counterfeiters to work as suppliers and cease counterfeiting. This puts less pressure on authorities, and advocates more on an economic equilibrium analysis.

Implications for Society:
Converting counterfeiters to authorized suppliers can reduce consumer surplus and does not improve social surplus unless authorities enforce high penalties on counterfeiters or the cost differential between two suppliers is substantial.


Implications for Research:
There is a growing emphasis on the design and execution of socially-responsible operations. This work contributes to the literature on counterfeiting with super fakes produced with the intent to sell in a non-deceptive manner.


Full Citation:
R. Lu, L., X. Fang, S.Y. Gao, B. Kazaz. 2024. Converting counterfeiters in emerging markets to authorized suppliers: A new anti-counterfeiting measure.


Abstract:
In recent years, "super fakes," i.e., high-quality counterfeits, have gained popularity. The ability of super fake manufacturers to produce high-quality products has inspired a novel anti-counterfeiting measure: converting counterfeiters to authorized suppliers. We develop a game-theoretic model to examine the interactions between a brand-name firm with a licit home supplier and a counterfeiter who can be potentially converted to an authorized overseas supplier. Our analysis leads to three main results. First, the brand-name firm can convert the counterfeiter to a licit supplier through either dual sourcing or single sourcing when the cost differential between two suppliers is moderate to high, or the quality perception differential between brand-name products produced by two suppliers is low. However, this conversion does not necessarily prevent counterfeiting unless the penalty from law enforcement is stringent. Our paper recommends that brand-name firms strategically use their wholesale pricing and sourcing decisions to establish socially responsible supply chain operations and prevent counterfeiting. Second, while dual sourcing is known for its risk diversification, our study identifies another benefit previously not reported in the literature: mitigating counterfeit risks. Dual sourcing can be more effective than single sourcing as the quality perception of super fakes approaches that of brand-name products, and its effectiveness becomes more pronounced when the brand-name firm offers wholesale price contracts in a sequential order. Conversely, single sourcing is preferable under conditions of high cost differential and low quality perception differential. Lastly, converting counterfeiters to authorized suppliers can reduce consumer surplus and does not improve social surplus unless authorities enforce high penalties on counterfeiters or the cost differential between two suppliers is substantial.


Web URL for the Article:
https://bkazaz.expressions.syr.edu/wp-content/uploads/2024/12/manuscript-and-online-supplement-20241216.pdf