Research Papers in Economics, Department of Economics, Stockholm University
No 2012:2:
Counterfeiting and Consumption Externalities - A Closer Look
Jonas Häckner ()
and Astri Muren ()
Abstract: Counterfeiting of trademarked products is an increasing
problem in national and international trade. We contribute to the analysis
of how counterfeiting affects markets by extending the work of Grossman and
Shapiro (1988a) on consumption externalities in prestige good markets. We
model a general aversion towards large levels of output (denoted prestige
externalities) interacting with a firm-specific aversion towards the
presence of copies in particular (pirate externalities). The framework is
used to examine several policy-relevant questions. First, we examine how
market prices depend on these externalities and provide conditions for
counterfeiting as an equilibrium outcome. Second, we compare market
outcomes to outcomes in otherwise identical markets that are not subject to
prestige externalities. Third, we describe how the substitutability between
copies and originals are related to prestige- and pirate externalities
respectively. Fourth, we compare market prices to prices chosen by a
benevolent social planner. Finally, we re-visit some policy issues
previously discussed in the literature.
Keywords: consumption externalities; counterfeiting; product differentiation; (follow links to similar papers)
JEL-Codes: D62; L13; (follow links to similar papers)
36 pages, January 25, 2012
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