Counterfeiters are becoming more sophisticated from shoes to infant milk powder and aircraft parts, creating problems for consumers, firms, and the governments. By endogenizing a counterfeiter's decisions on his quality, price, and type - deceptive, so infiltrating a licit (but complicit) distributor, or non-deceptive in an illicit channel, we provide insights into when anti-counterfeiting strategies work well and when they do not. For example, improving the quality of branded goods is effective against the non-deceptive counterfeiter, but not against the deceptive counterfeiter because the counterfeiter can get a free ride on the improved quality. Reducing price could also be ineffective against the deceptive counterfeiter but only when the current price is relatively high. Both strategies could even hurt consumer welfare when facing either counterfeiter (but under different conditions). Surprisingly, these strategies do not work better when consumers are strategic because a counterfeiter can take advantage of consumers' rational beliefs.
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