Wednesday, July 2, 2008

Economics of Pirated Goods

The five luxury European brands namely Burberry, Gucci, Prada, Chanel & Louis Vuitton jointly filed a lawsuit against the Chinese Silk Market for facilitating the sales of counterfeit handbags which look like the original ones”

---Beijing Times---

French name-brand Lacoste has brought to court the owner of Beijing's Silk Market Plaza and some of its tenants for selling fake T-shirts with its labels, claiming its trademark was infringed upon”, Chinese Government’s Official Web Portal---

China is well known as the “land of paradise” for counterfeit goods & at least 70% of worldwide pirated goods originate from there.

The reason for the presence of pirated goods can be analysed from 2 angles.

Why people demand?

1. Cheap & it works as good as the original ones. Most of these goods illegally use big names such as Nike, Gucci, Prada & Rolex (just to name a few). Some even produce exactly the similar design & pattern but with a fake brand name. However its price is sometimes less than 10% of the original ones & it can still be bargained

2. To project image but having tight budget. There are many people out there who want to wear & use branded goods. However branded goods often come with a hefty price. Using counterfeit goods which look similar or even bearing the branded name itself can project a ‘luxurious’ image to an individual

3. Ease of availability

4. Weak or no law enforcement against people who buy counterfeit goods. As such people will continue to support these goods given that there is low risk of discovery or prosecution

Why producer supply?

1. Weak legal enforcement. 2 reasons accounted for this. The existing penalty or fine is minimal. Producers do not mind paying for those fine if they were caught as it resembles an insignificant portion of their profits. Second, enforcements which are seasonal & not continuous

2. Low reinvestment & moderate technology requirements. E.g. Nike may need to incur millions to advertise its new product, conduct research in finding out how to maximise users’ comfort, pay wages to employee etc. Meanwhile producers of fake Nike shoes make lots of profit & save all these costs simply by using its brand illegally (leveraging). The only cost that matter the most is raw material

3. High per unit profitability. Producers of counterfeit goods enjoy very low costs on 2 bases. First not having to reinvest their profit into the business & second significant EOS especially technical. This explains why they are able to sell their goods at such a low price compared to original ones

Economic implication

1. Innovation & growth. Innovators protect their ideas through patents, trademarks & copyrights. Without proper & adequate protection for intellectual property right, the incentive to develop new ideas & products would be reduced. In other words, possible fall in the production of goods & services that can hamper economic growth. By then, consumers will have lesser choice to pick from

2. Negative externalities. Growing volume of seized goods raises environmental issues since their destruction creates a great amount of non-biodegradable waste. Also use of counterfeit fertilizers caused serious damage to the environment

3. Increasing unemployment in the economy. Many firms have reported millions if not billions of losses as a result from increasing piracy activities. To remain profitable, the normal action being taken is to shed employment since that is the easiest way to reduce operation costs

4. FDI (Foreign Direct Investment). An intellectual property right is one of many factors considered by firms who are investing abroad. According to research done by OECD, FDI from Germany, Japan & US was relatively higher in economies with lower rate of counterfeiting

5. Losses from royalties. Royalties are usage-based payments made by the licensee to the licensor from the ongoing usage use of an intellectual property rights

6. Costs of combating piracy. E.g. costs of inspection, large scale campaigns to persuade consumers to buy original goods etc & yet the results are by no mean guaranteed.

In a nutshell, there is no definite way we can break the law of demand here. Most people will still stick to cheap pirated good which is almost a perfect substitute most of the time. So long there is a demand, there will be a supply.

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