Against Monopoly

defending the right to innovate

Monopoly corrupts. Absolute monopoly corrupts absolutely.

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Imitation is the sincerest form of flattery

From the NBER Digest:


Counterfeits ... steal demand from low-end authentic products, but [have] positive spillover effects for high-end authentic products.

In fiscal 2009, the U.S. Customs and Border Protection seized more than $260 million worth of counterfeit goods, with counterfeit footwear accounting for 40 percent of the total seizures. Counterfeit footwear has topped the seizure list of the customs service for four years. How does the existence of such counterfeits affect the sales of authentic products?

In Counterfeiters: Foes or Friends? (NBER Working Paper No. 16785), author Yi Qian analyzes product data from Chinese shoe companies over 1993-2004. She can study the impact of policy changes, such as the 1995 change in government enforcement efforts in monitoring footwear trademarks in China. That change had different effects on counterfeit entry for branded companies with varying degrees of closeness to the Chinese government.

Qian finds that counterfeits have positive advertising effects for the brand of shoes they copy. However, they have negative substitution effects for the authentic products, driving buyers away from the authentic shoe to the counterfeit one. For sales of high-end authentic products, the positive advertising effect dominates the substitution effect. For sales of low-end authentic products, the negative substitution effect outweighs the advertising effect. All of the effects last for a few years before leveling off. And, these different effects for different products reinforce incentives for authentic producers to innovate and to move upward in the quality portfolio. Finally, after the entry of counterfeiters, market shares for the higher quality products increase while those of the lower end products decline.

Qian tests these results by conducting some surveys and finds similar effects regarding the purchase intent of high-end, medium-end, and low-end branded products. Her subjects' responses suggest that counterfeits signal brand popularity, at least to some consumers. Counterfeits thus appear to steal demand from low-end authentic products, but their presence has positive spillover effects for high-end authentic products.

--Lester Picker

link to the paper


The scope of the paper is too broad. Instead of "counterfeiters, friend or foe," the paper should have read "Shoe Counterfeiters: Friend or Foe."

Manufacturers of equipment have seen a disturbing trend in the substitution of high tech components, such as shafts, actuators, filters, etc., by counterfeits. The counterfeits often do not have the life or performance of the product for which they substitute, and the end product is breaking due to the substitution. The individuals with the broken product then return to the manufacturer claiming a defect, when the problem was the end user's substitution of a counterfeit part. When volumes were low, manufacturers were often eating the increased warranty costs. However, that leniency appears to have been generally halted by manufacturers because of the volume of warranty claims relating to the substitution of counterfeit parts.

Interestingly, even some Chinese companies appear to have fallen victim to defect by counterfeit substitution, and quality Chinese producers have joined the battle against low-quality counterfeiters in order to keep warranty costs under control.

I look forward to expanded research of counterfeiters as it relates to machinery and the experience of machinery manufacturers.

The counterfeits often do not have the life or performance of the product for which they substitute, and the end product is breaking due to the substitution. The individuals with the broken product then return to the manufacturer claiming a defect, when the problem was the end user's substitution of a counterfeit part.

This does not make sense. Generally, if the end user opens up a machine and replaces an internal part, that voids the warranty. On the other hand, if a service person replaces a part, damn right they should be on the hook for repairs if they put a defective or otherwise shoddy replacement part in.

The only exceptions would be parts users are supposed to replace, like batteries and ink cartridges and stuff. Replacement of those generally is not covered under warranty, though, unless like an iPod's battery it's not (meant to be) user-serviceable, so if you have to replace it again sooner than normal because you used a substandard replacement the first time, again you won't be sticking the manufacturer with a warranty claim.


The example that comes to mind is filtration. I have read papers describing the required filtration for various systems and the effect improper filtration can have on performance of the system, regardless of whether the filtration is for a pump for water, oil, or other type of pump, or for an internal combustion engine.

Filters are replaceable by an end user. Improper filtration will (there appears to be no "may") damage a pump or an engine. If the pump or engine is under warranty, then the end user is likely to claim the damage is covered under warranty when the real cause is improper filtration.

I believe I have read of other examples where end user replaced counterfeit parts has voided warranty. As another example, along the lines of your comment, is a generic ink cartridge that a manufacturer claimed damaged a printer in which the cartridge was used. My understanding is that the printer ceased to function and the manufacturer claimed that the viscosity of the ink was incorrect for the printer. The manufacturer also stated in their warranty that use of non-manufacturer supplied ink cartridges voided their warranty; I believe most printer manufacturers have similar statements.

My experience with generic cartridges has been hit or miss. I am using an Epson inkjet printer with generic cartridges, and they work wonderfully well. I had an HP printer and shortly after I started using generic cartridges the printer refused to work, regardless of what I did. I even tore the printer down completely and cleaned the nozzles manually, but it never did work properly again and I replaced that printer. It is possible that the use of the generic cartridges and failure of the printer was coincidence, but the printer was about a year old and I usually get 3-6 years of life from an inkjet.

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