Working Paper: CEPR ID: DP103
Authors: Gene M. Grossman; Carl Shapiro
Abstract: We analyze a two-country model of trade in both legitimate and counterfeit products. Domestic firms own trademarks and establish reputations for delivering high-quality products in a steady-state equilibrium. Foreign suppliers export legitimate low-quality merchandise and counterfeits of domestic brand-name goods. Heterogeneous home consumers either purchase low-quality imports or buy brand-name products, rationally expecting some degree of counterfeiting of the latter. We characterize a counterfeiting equilibrium and explore its properties. We describe the positive and normative effects of counterfeiting in comparison with a no-counterfeiting benchmark. Finally, we provide a welfare analysis of border inspection policy and of policy regarding the disposition of counterfeit goods that are confiscated at the border.
Keywords: Counterfeiting; International Trade; Welfare Analysis; Border Inspection
JEL Codes: D43; F12; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| counterfeiting (K42) | decrease in domestic welfare (H53) |
| counterfeiting (K42) | decrease in world welfare (I30) |
| counterfeiting (K42) | increase in foreign welfare (I38) |
| counterfeiting (K42) | decrease in price-quality mix of brand-name products (L15) |
| increased border inspection (F55) | reduce market share of counterfeits (L17) |
| increased border inspection (F55) | compel domestic firms to enhance product quality (L15) |
| selling confiscated counterfeit goods (K42) | shift production into the counterfeiting sector (E26) |
| counterfeiting (K42) | decrease in consumer willingness to pay for quality goods (D11) |