Fines Imposed on Counterfeiters and Pocketed by the Genuine Firm. A Differential Game Approach

Abstract

We consider competition between a legal firm that sells a product protected by intellectual property rights (IPR) laws and a counterfeiter who illegally copies and sells products without the permission of the brand-name producer. Each time the counterfeiter is caught, the payment of a fine proportional to the amount confiscated and to the price of the original goods is imposed. However, fines are pocketed by the legal firm. In this paper, a differential game is studied in which both firms compete for prices while the legal firm invests in advertising to increase goodwill and, accordingly, demand. Based on this, a feedback Nash equilibrium is computed and discussed. Unfortunately, the analytical results are too complex to allow an explicit comparison between the payoff of the producer with and without the presence of counterfeiting. However, through some numerical simulations, it is shown that, under specific values for the parameters of the model, the genuine producer can be also better off in the presence of counterfeiting rather than in its absence.

This is a preview of subscription content, log in to check access.

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7

Notes

  1. 1.

    The U.S. International Trade Commission (1984, p. vii).

  2. 2.

    https://cdn.iccwbo.org/content/uploads/sites/3/2017/02/ICC-BASCAP-Frontier-report-2016.pdf [Last accessed 30 March 2017].

  3. 3.

    Cesareo [3], in her book, identify, analyse and systematize the available research on counterfeiting and piracy published from 1980.

  4. 4.

    From Yao [21]: a pegged-fine counterfeit monitoring regime can be found in several countries. For example, the US Anti-Counterfeiting Consumer Protection Act of 1996, 1136, provides civil fines pegged to the value of the genuine goods. Fines for repeat offences are limited to not more than twice the domestic value of the merchandise as if it had been genuine, based on the manufacturers suggested retail price of the merchandise at the time of seizure. Another example is in Taiwan where the pegged ratio of fines ranges from 500 to 1500 (Taiwan Trademark Act of 1997, Article 66).

  5. 5.

    We denote by \([x]_+=\max (0,x).\)

References

  1. 1.

    Banerjee DS (2003) Software piracy: a strategic analysis and policy instruments. Int J Ind Organ 21(1):97–127

    Article  Google Scholar 

  2. 2.

    Buratto A, Grosset L, Zaccour G (2016) Strategic pricing and advertising in the presence of a counterfeiter. IMA J Manag Math 27(3):397–418

    MathSciNet  Article  Google Scholar 

  3. 3.

    Cesareo L (2016) Counterfeiting and piracy. A comprehensive literature review. Springer, New York

    Google Scholar 

  4. 4.

    Chacharkar DY (2013) Brand imitation, counterfeiting and consumers. Centre for Consumer Studies Indian Institute of Public Administration, New Delhi

  5. 5.

    Commission of the European Communities (1998) Combating counterfeiting and piracy in the single market. Green Pap 569:1–29

    Google Scholar 

  6. 6.

    Cordell VV, Wongtada N, Kieschnick RL (1996) Counterfeit purchase intentions: role of lawfulness attitudes and product traits as determinants. J Bus Res 35(1):41–53

    Article  Google Scholar 

  7. 7.

    Di Liddo A (2018) Does counterfeiting benefit genuine manufacturer? The role of production costs. Eur J Law Econ 45(1):81–125

    Article  Google Scholar 

  8. 8.

    Di Liddo A (2019) Competition in the presence of counterfeiters: the case of fines imposed on counterfeiters and pocketed by the genuine firm. To appear in International Game Theory Review

  9. 9.

    El Harbi S, Grolleau G, Bekir I (2014) Substituting piracy with a pay-what-you-want option: Does it make sense? Eur J Law Econ 37(2):277–297

    Article  Google Scholar 

  10. 10.

    Grossman GM, Shapiro C (1988a) Counterfeit-product trade. Am Econ Rev 78:59–75

    Google Scholar 

  11. 11.

    Grossman GM, Shapiro C (1988b) Foreign counterfeiting of status goods. Q J Econ 103:79–100

    Article  Google Scholar 

  12. 12.

    Jørgensen S, Di Liddo A (2007) Design imitation in the fashion industry. In: Jørgensen S, Quincampoix M, Thomas LV (eds) Advances in dynamic game theory. Birkhauser, Basel, pp 569–586

    Google Scholar 

  13. 13.

    Jørgensen S, Zaccour G (2004) Differential games in marketing. Kluwer, Boston

    Google Scholar 

  14. 14.

    Nerlove M, Arrow KJ (1962) Optimal advertising policy under dynamic conditions. Economica 29(114):129–142

    Article  Google Scholar 

  15. 15.

    OECD (2008) The economic impact of counterfeiting and piracy. OECD Publishing, Paris

    Google Scholar 

  16. 16.

    OECD/EUIPO (2016) Trade in counterfeit and pirated goods: mapping the economic impact. OECD Publishing, Paris

    Google Scholar 

  17. 17.

    Qian Y (2008) Impacts of entry by counterfeiters. Q J Econ 123:1577–1609

    Article  Google Scholar 

  18. 18.

    Qian Y (2014) Brand management and strategies against counterfeits. J Econ Manag Strategy 23(2):317–343

    Article  Google Scholar 

  19. 19.

    Tsai MF, Chiou JR, Lin CHA (2012) A model of counterfeiting: a duopoly approach. Jpn World Econ 24(4):283–291

    Article  Google Scholar 

  20. 20.

    Yao JT (2005a) Counterfeiting and an optimal monitoring policy. Eur J Law Econ 19(1):95–114

    Article  Google Scholar 

  21. 21.

    Yao JT (2005b) How a luxury monopolist might benefit from a stringent counterfeit monitoring regime. Int J Bus Econ 4(3):177–192

    Google Scholar 

  22. 22.

    Yao JT (2015) The impact of counterfeit-purchase penalties on anti-counterfeiting under deceptive counterfeiting. J Econ Bus 80:51–61

    Article  Google Scholar 

  23. 23.

    Zhang J, Hong LJ, Zhang RQ (2012) Fighting strategies in a market with counterfeits. Ann Oper Res 192(1):49–66

    MathSciNet  Article  Google Scholar 

  24. 24.

    Zhang J, Zhang RQ (2015) Supply chain structure in a market with deceptive counterfeits. Eur J Oper Res 240(1):84–97

    MathSciNet  Article  Google Scholar 

Download references

Acknowledgements

The authors thank the anonymous referees who have contributed, with their valuable observations and suggestions, to significantly improve this paper.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Andrea Di Liddo.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Electronic supplementary material

Below is the link to the electronic supplementary material.

Supplementary material 1 (pdf 228 KB)

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Biancardi, M., Di Liddo, A. & Villani, G. Fines Imposed on Counterfeiters and Pocketed by the Genuine Firm. A Differential Game Approach. Dyn Games Appl 10, 58–78 (2020). https://doi.org/10.1007/s13235-019-00310-6

Download citation

Keywords

  • Differential games
  • Counterfeiting
  • Fines
  • Intellectual property rights
  • Numerical simulations

Mathematics Subject Classification

  • 91A23
  • 91A80

JEL Classification

  • C73
  • D23