Impacts of Counterfeiting on a Global Supply Chain

Problem definition: This paper investigates how counterfeits influence a global supply chain and how the supply chain should effectively take anticounterfeit actions. Academic/practical relevance: The impacts of counterfeiting have been increasingly profound on global supply chains. It is critical to understand how counterfeiting impacts supply chains when supply chain members act in their own interests, and how supply chains can effectively combat counterfeiting when all the members can contribute to it. This is the first paper that offers insights into these important questions. In particular, we examine who among the supply chain members is in the best position to perform counteracting activities, how these members can cooperate in anticounterfeiting, and what economic implications the anticounterfeit actions have to the supply chain, individual firms, consumer surplus, and social welfare. Methodology: We consider a supply chain consisting of a manufacturer and a retailer, and analyze a game-theoretical framework to derive the equilibrium. Results: The manufacturer prefers to induce the retailer to combat counterfeits rather than to combat itself. Contrary to conventional wisdom, counterfeits can increase the supply chain’s profit even in the absence of network externality effects. The crux is that the manufacturer lowers wholesale price to incentivize the retailer’s counteraction and, consequently, the threat of counterfeits can mitigate double marginalization and benefit the supply chain. Managerial implications: Our results demonstrate that a sustainability risk can trigger collaborative endeavors of supply chain members and thus be advantageous to the supply chain. The findings also underscore the important role that retailers should play in anticounterfeiting. Particularly, it can be in the supply chain’s interest that the manufacturer does not execute the counteraction, either jointly with the retailer or by itself.