Tuesday, January 31, 2006

How do counterfeit shoes affect the market for authentic shoes?

I hated the stretch of road from the bus-stop to my college, in Bangalore. One of the most treacherous roads for a 3 yr-old Bata pair. They were on the verge of bidding goodbye to their "sole." My brother (then studying in US) decided to chip in with a noble grant of 100$ for splurging on myself. I was ecstatic. I took a nice big bag and armed with the 100$ went off to to Brigade Road. If you want to buy branded shoes this is the place in Bangalore, my friends advised me. I entered Reebok, got a shock; went to Adidas, got embarassed; made a stop at Nike and couldn't help getting psyched out at the prices. What seemed a princely sum of $100 was no match for the prices of these branded shoes. I couldn't help wondering what made them so costly. Miffed and sad, I bought a softee and made my way to Gangaram's, my favourite book haunt.

But the puzzle remained unresolved.

It turns out that the flourishing counterfeit market for shoes may well have been responsible for this phenomenon. A few kms away, you had the National Market, where you could buy counterfeits and imitations of the branded shoes. While counterfeits produce goods of lower quality and attempt to pass them of as authentic, the imitations are usually reverse-engineered and are honest about their difference from the authentic product lineage.

So what will be the impact of these on the authentic manufacturers' market prices and strategies?

Read Yi Qian's paper from Harvard University called Pricing and Marketing Impacts of Entry by Counterfeiters and Imitators which elaborates on the shoe market in China for it.

A caveat. The results will definitely not be true for pharmaceutical and software markets where the structure is different. This study is significant because it studies the shoe market when the Chinese government stopped monitoring it due to a reallocation of government resources, and the authentic companies took the mantle upon themselves to invest in enforcement activities.

So what happened?

To distinguish themselves, the authentic companies were induced to produce higher quality products and set higher prices. The higher prices were set to convey authencity. Non-price signaling strategies were establishment of licensed stores and attachement of holograms. A successful strategy for companies to stave the threat of copycat competition was through innovation. For example, before the entry of counterfeits, the authentic companies used domestic equipment which was later replaced by imported equipment and introduction of new technologies for footwear.

For me, this gives rise to a fresh new set of questions.

* What was the degree of price and quality difference between the authentic and the fake or the imitation? It seems to be that the market is evolving where the higher end is being occupied by innovating brands with competition from imitations and counterfeits that are occupying the middle and lower segments.
* The market share for the imitation is especially interesting. That shows the section of customers who are willing to settle for a less-quality minus the brand value. Bentinck Street in Kolkata is a good example.
* Fake shoes involve two possibilities. Either I know that the shoe is fake or I don't know that the shoe is fake. How do those factors affect the market share for the fake shoes?
* If enforcement costs can be internalized by companies, what does it imply for governments? Do they need to maintain an Economic Offences Wing (as in Delhi) at such huge costs? Either you can have the government for enforcement measures or you can put the onus of it on the shopkeeper. If the shopkeeper sells you a fake, you can take him to court. Which approach is better? I am still not sure that it is the duty of the government to protect every kind of property right!

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