Counterfeiters: Foes or Friends? How Do Counterfeits Affect Different Product Quality Tiers?

A key concern about counterfeits and weak intellectual property protection is that they may hamper innovation by displacing legitimate sales.This paper combines a natural policy experiment with randomized lab experiments to estimate the heterogeneous impacts of counterfeiting on the sales and consumer purchase intent related to branded products of various quality levels.I collect new product-line-level panel data (1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004) on Chinese shoe companies.I identify heterogeneous effects of counterfeit entry on sales of authentic products of three quality tiers, finding that counterfeits have both advertising effects for a brand and substitution effects for authentic products, additionally the effects linger for some years.The advertising effect dominates the substitution effect for highend authentic-product sales, and the substitution effect outweighs the advertising effect for low-end product sales.The positive effect of counterfeits is most pronounced for high-fashion products (such as women's high-leg boots and dress shoes), for shoes tailored to young customers, and for high-end products of brands not yet well-known at the time of counterfeiter entry.