Duopoly competition with non-deceptive counterfeiters

This paper considers that two differentiated branded firms compete in the Hotelling's framework and face outside competition from non-deceptive counterfeiters. The presence of counterfeit goods gives rise to two various effects on branded firms' profit: on the one hand, it undermines the sale of branded goods (substitution effect); on the other hand, it alleviates the intensity of price competition between branded firms (price increasing effect). We argue that, under certain circumstances, the price increasing effect may dominate the substitution effect, thereby boosting the branded firms' profits. We also discuss the impact of the strength of intellectual property right (IPR) enforcement on the price and profit of the branded firms. The discussion may shed light on a long-standing debate on criminalizing the purchase of counterfeit goods.