Counterfeiting can be good for luxury goods sales

A pair of studies, one of US consumers and one of Chinese consumers, show that counterfeiting of high-end branded goods can generate more sales. The Slate article discusses the notion of counterfeits as gateways to the real thing, and of successful strategies for distinguishing fakes from licensed goods.

But there's another dimension to the relationship of counterfeits to luxury goods. "Positional goods" are products whose value is derived in part from what they say about their owners ("I can afford to buy this expensive thing"). When a positional good — this year's Prada handbag — is knocked off and widely distributed, the legit goods no longer convey their intended message. For people who scrimped and saved to buy their one real handbag, this is terrible news. But cost-insensitive (rich) customers, who are the core market for luxury goods, are spurred to go out and buy this year's Prada bag, to distinguish themselves from the hoi polloi.

But a dirty little secret is that Prada rip-offs can also function as free advertising for real Prada handbags–partly by signaling the brand's popularity, but, less obviously, by creating what MIT marketing professor Renee Richardson Gosline has described as a "gateway" product. For her doctoral thesis, Gosline immersed herself in the counterfeit "purse parties" of upper-middle-class moms. She found that her subjects formed attachments to their phony Vuittons and came to crave the real thing when, inevitably, they found the stitches falling apart on their cheap knockoffs. Within a couple of years, more than half of the women–many of whom had never fancied themselves consumers of $1,300 purses–abandoned their counterfeits for authentic items…

That said, global brands might devote more of their efforts to upgrading their own products, taking a page from the playbook of footwear manufacturers challenged by Chinese counterfeiters in the 1990s. In addition to ramping up their own enforcement efforts to substitute for the work of government investigators, these manufacturers made their high-end items even more expensive, to further distance their products from imitators. They added more top-tier leather, more crocodile hides, more use of imported machinery. Most of these improvements came in the form of upgrades to surface and side materials, which would clearly distinguish authentic shoes from knockoffs. The manufacturers seem to have come to the same conclusion Qian did: For top-of-the-line products, imitation isn't merely flattery–it's also good for business.

The Highest Form of Flattery

(Thanks, TimHarford)