Mathematic model can guide anti-counterfeit strategy

Brand owners often cite a lack of data about the way counterfeits penetrate the supply chain as a barrier to tackling the problem, but researchers in China are developing mathematical models to help them understand how the illicit market functions.

Their research focuses not on non-deceptive counterfeits - such as a $20 Louis Vuitton bag that the purchaser clearly knows is not genuine - but rather fakes which are deceptively packaged and sold as authentic brand name products via the brand owner's supply chain.

A key focus of the analysis - which is published in the European Journal of Operational Research (Volume 240, issue 1) - is to examine whether companies should restructure their supply chains if they discover deceptive counterfeits.

Some brand owners choose to sell through restrictive channels such as dedicated, authorised retailers or only via their own Internet store, while others rely on general retailers and a third category use both.

In their paper, Jie Zhang of the Guangdong University of Finance and Economics and Rachel Zhang of the Hong Kong University of Science and Technology focus on the general channel and look at variables such as wholesale pricing and  consumers' risk attitude towards counterfeits, as well as their loyalty towards reliable stores.

Among the findings of the modelling exercise was that deceptive counterfeits lower the price and the sales of authentic products, and general retailers will carry counterfeits as long as the quality is high enough.

A key finding in the modelling exercise was that while brand name companies faced with deceptive counterfeiting may be tempted to try to control the problem by only selling through a restricted distribution channel such as manufacture-owned stores or certified retailers, this may not always be the best strategy in terms of preserving profitability.

If the quality of counterfeits is high, companies should consider selling through both the general and restrictive distribution channels as this "enables brand name companies to reach more consumers and is still more profitable."

The situation is slightly different when the brand name company is launching into a new market, however, as "selling through dual channels may encourage the general retailer to sell more counterfeits in order to protect its profitability."

"In practice, many brand companies sell their products through dual channels even if the general channel has been penetrated by counterfeits," write the authors.

"Our analysis provides justification of such practices."


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