Counterfeiters in Online Marketplaces: Stealing Your Sales or Sharing Your Costs

In recent years, criticism of online marketplaces has been incessant because of the widespread presence of counterfeit goods. This study develops an analytical framework to investigate the interactions among an online marketplace, an authentic brand seller, and a counterfeiter of the brand. Both sellers exert efforts to attract sales for the brand, and the online platform determines its effort level in combating counterfeiters. Our analysis reveals several interesting insights. First, our analysis shows that the platform’s combating effort has a non-monotonic impact on both sellers’ profits. Second, the platform’s optimal combating effort level relies on the production cost of the authentic firm. The platform finds it optimal to exert maximum possible effort to combat counterfeiters when the unit cost of the authentic product is very low, and not to combat when the unit cost is very high. Third, interestingly, the authentic seller can be better off with a higher production cost due to the strategic reaction of the platform whose revenue derives from both types of sellers. The intuition and managerial implications of these insights are discussed.