Counterfeiters in Online Marketplaces: Stealing Your Sales or Sharing Your Costs

Abstract

In recent years, criticism of online marketplaces has been incessant because of the widespread presence of counterfeit goods. This study develops an analytical framework to investigate the interactions among an online marketplace, an authentic brand seller, and a counterfeiter of the brand. Both sellers exert efforts to attract sales for the brand, and the online platform determines its effort level in combating counterfeiters. Our analysis reveals several interesting insights. First, we find that the platform’s combating effort has a non-monotonic impact on both sellers’ profits. Second, the platform’s optimal combating effort level relies on the production cost of the authentic firm. When the unit cost of the authentic product is very low, the platform will find it optimal to exert maximum possible effort to combat counterfeiters; when the unit cost is very high, the platform’s optimal strategy is not to combat counterfeiters; when the unit cost is intermediate, the platform should exert an intermediate level of combating effort. Third, interestingly, the authentic seller can be better off with a higher production cost because of a demand-side externality and the strategic reaction of the platform whose revenue derives from both types of sellers.

Keywords: counterfeit, online marketplace, production cost, selling effort, game theory

JEL Classification: M31