Counterfeiting costs companies as much as US$600 billion a year, and the situation is rapidly becoming worse. How does counterfeiting affect global supply chains, and how can it best be combated? These were the questions explored by Man Yu and Ki Ling Cheung of HKUST and their colleague—with rather surprising results. They found that the threat of counterfeiting can actually boost supply chain profits by prompting supply chain members to collaborate. This novel work has important implications for the formulation of effective anti-counterfeiting strategies in the global market.

“Although counterfeited products used to be largely restricted to high-end watches, fashion clothes, designer apparels, accessories, precious jewelry, and music recordings,” say the researchers, “nowadays counterfeiting is a ubiquitous problem in a wide range of product categories.” The problem of counterfeiting has grown by over 10,000% in the past 20 years, and it is now an ever-present threat to brand owners’ profitability and sustainability. “The motivation behind commercial counterfeiting is clear: free-riding on the economic value associated with brand ownership,” explain the researchers.

Global supply chains are becoming ever more complex, and each member of a supply chain—whether supplier, manufacturer, or retailer—plays a vital and unique role in getting a product to consumers. “Who among the supply chain members,” ask the researchers, “is in the best position to take responsibility for counteracting counterfeits?” Should this fall on the shoulders of retailers or brand owners? And how should members of the supply chain cooperate in their anticounterfeit actions?

The researchers constructed an elegant model to examine the influence of counterfeits on a global supply chain. They considered a supply chain consisting of a manufacturer and a retailer under threat from counterfeited products. By examining a number of conditions, including the contribution of market conditions to anticounterfeit actions, the authors were able to define the impact of counterfeiting on pricing and profitability and delineate the optimal strategy for anticounterfeit efforts.

The model revealed that of all supply chain members, the retailer is best positioned to combat counterfeits. Retailers can probe and screen fake products, provide information to prosecutors if taking legal action, and educate customers about recognizing fake products. “Because of retailers’ strategic position,” say the researchers, “it is imperative for manufacturers to incentivize them to join hands in fighting counterfeits.” Firms should not engage in simultaneous anticounterfeiting and combating activities, as this can dampen manufacturers’ incentive to lower the wholesale price.

Against conventional wisdom, the authors also found that the threat of counterfeiting actually increased the supply chain’s profit. Briefly, the occurrence of counterfeiting encourages the manufacturer to lower the wholesale price to encourage the retailer to take anti-counterfeiting actions. “As a result, the counterfeit serves as a coordination device to reduce double marginalization in the supply chain,” explain the authors. When this effect outweighs the costs required to combat counterfeits, the overall profitability of the supply chain increases.

This important study shows for the first time that the threat of counterfeits sparks collaborative endeavors that unexpectedly end up enhancing profitability. This is a crucial insight for firms, especially when the quality of their products is not extremely high or extremely low. Previous research states that “the brand seeks to innovate only when the counterfeit quality is within a certain range. If the counterfeit quality is too low, it does not post sufficient threat to induce innovation. If the quality is too high, innovation may not alleviate competition.” Interestingly, this coincides with our finding that counterfeits benefit a supply chain only when the authentic product quality is neither too high nor too low. It is through product design and supply chain alignment, among other initiatives, that companies may reap in the near- or even longterm under the threats of counterfeits. “In this regard, this paper gains a new perspective from the supply side on how counterfeits can benefit authentic products,” conclude the authors.