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

Abstract

In recent years, “super fakes,” that is, 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.