The strategic impact of vertical integration on non-deceptive counterfeiting

Counterfeits have been common in practice despite ongoing criticisms and regulations. This paper analyzes the strategic effect of vertical integration on non-deceptive counterfeiting. We find that integration has a less stringent requirement on the efficiency of the brand product's quality improvement and can serve as an anti-counterfeiting strategy to help the brand firm deter non-deceptive counterfeits. However, integration may also increase the demand of the non-deceptive counterfeit. Integration always increases the brand product's quality and demand facing non-deceptive counterfeits. Compared to decentralization, the counterfeiter's profit is lower under integration when the counterfeit imitation is close and brand product's quality improvement is highly efficient. Besides, our result indicates that with non-deceptive products, the brand firm can benefit from integration, which however may also benefit the counterfeiter. Furthermore, vertical integration always enhances consumer and social welfare. Finally, we also extend the model to other cases including sequential quantity competition and two types of product features.