A recent article published by WWD entitled, “The Benefits of Counterfeit Competition,” suggests, well, just that: there are benefits to be derived from the sale of fakes. Writing for WWD, Evan Clark cited “Untangling Searchable and Experiential Quality Responses to Counterfeiting,” a study published in Market Science academic journal, which “looked at 31 brands that sold fashion leather and sport shoes in China from 1993 to 2004.”
According to the study, “When counterfeiting grows too rampant and fools too many consumers, the market incentives turn … The authentic brand will invest to innovate and differentiate itself from counterfeiters in terms of searchable quality … Counterfeiting induces the authentic producer to invest more in the product’s searchable quality (e.g., appearance) and less in experiential quality (e.g., the functionality of the shoes, not apparent to consumers at the time of purchase).” It also states: “In particular, the branded companies that survived counterfeit infringements all significantly improved their shoes’ surface, side materials and appearance … Subsequently both brand image and customer loyalty are enhanced.”
This makes sense. In an attempt to persuade purchasers to buy the real thing, brands are upping their game, so to speak. They are seeking to differentiate themselves and their products from the copycats. This is good in terms of innovation in design.
What the WWD article (and I’m assuming the Market Science academic journal’s study) misses, though, is the effect that counterfeiting has on high fashion brands’ most valuable asset: their intellectual property. This is significant, and thus, worthy of a discussion.
Most brands most valuable form of IP is their trademark(s). A trademark is a source identifier, letting the public know the source of particular goods or services offered under the trademark. The goal of trademark law is, thus, not to incentivize original design. It is not for the purpose of encouraging creativity. Trademark law, which generally extends to a designer’s logo or name and in some cases, the appearance or packaging of an item, is, at its core, in place to protect consumers and improve the quality of information in the marketplace. (Trademark law protections have arguably expanded quite a bit from this goal, making it, as some argue, an impediment to competition – but that is a discussion for another day).
As you may already know, counterfeiting is a trademark term that refers to the practice of manufacturing, selling or otherwise dealing in goods, often of inferior quality, under a trademark that is identical to or substantially indistinguishable from a registered trademark, without the approval of the registered trademark owner. In order for use to amount to counterfeiting, the goods or services are those for which the genuine mark is registered with the U.S. Patent and Trademark Office. This is a separate and distinct practice from manufacturing and/or selling trademark infringing goods, which are those that bear a trademark that is confusingly similar mark but not identical. So, an example of counterfeiting is the unauthorized sale of bags bearing the Gucci logo by a brand that is not Gucci – because Gucci has registered its marks in the class of goods that includes handbags.
As indicated above, counterfeiting is especially damaging for to a brand for two reasons. Primarily, counterfeiting is damaging because it involves the sale of items bearing a brand’s trademark, and those items are usually of lesser quality. Secondly, the items are of the same type as those that the brand owner sells. This leads to confusion amongst consumers and damage to a brand’s image, particularly for luxury brands.
With this in mind, the benefits that allegedly come as a result of the competition created by counterfeits must be weighed against the damage that is done to a brand as a result of fakes. In the luxury sector, much of what makes a brand successful, and what allows them to demand higher prices, is, of course, quality and thoughtfulness of design. The other big and I mean, BIG, part of it is brand image. The cache that comes along with the name Gucci or Louis Vuitton or Chanel, etc. These are trademarks, and the abstract notion of luxury and glamorousness and high fashion that comes with them is referred to, in trademark terms, as goodwill. Goodwill is an intangible asset that provides added value to the owner's worth. It is the recognition of a specific trademark, such as Prada, among consumers and the extra earning power that it generates.
Now consider the current state of the counterfeit market. The market is vast (just search for #Hermes on Instagram and you’ll see what I mean). Counterfeits are designed to deceive consumers into believing they are the real thing, and this has actually become increasingly easy thanks to the internet. Counterfeiters can (and DO) set up shops online, make them look legitimate (by using authentic photos and by charging prices very close to the prices of the legitimate goods), and trick consumers. This has an effect on brands’ goodwill. If a consumer assumes that the counterfeit is genuine, and subsequently discovers that it is of poor quality, or sees the saturation of the market as a result of the sale of many, many counterfeits, there is a loss of goodwill that has a very real effect on the demand for the authentic goods. And this builds up over time.
This is all to say that the manufacturing and sale of counterfeits is a complex issue. If it does, in fact, have benefits, they are surely outweighed by the damage that they do to brands both in terms of revenue and maybe more importantly, cumulatively, in terms of their brand image (or goodwill).