Fake Prada bags: Why counterfeits help high-end designers sell more of the real thing.

The search for better economic policy.
May 30 2011 8:04 AM

The Highest Form of Flattery

Do knockoff Prada bags hurt Prada—or help the company sell more of the real thing?

Illustration by Mark Alan Stamaty. Click image to expand.

If New York City councilwoman Margaret Chin has her way, it may soon be illegal to own a fake Prada handbag, or any of the other counterfeits openly sold in her Chinatown district, the " ground zero" for New York's knockoffs. Chin's proposed $1,000 fine for counterfeit buyers is merely the latest salvo in the war against designer rip-offs waged by the FBI, industry groups, and designers themselves.

Yet a preliminary study focused on counterfeit sales in China—the source of all those fake handbags in Chinatown and just about everywhere else—suggests that in many cases the sale of fakes may not be so bad for legitimate brands. The study, by Northwestern economist Yi Qian, examined the counterfeit market in the wake of well-publicized cases of food poisoning and exploding gas tanks in China, when enforcement efforts were diverted from policing fashion copycats and toward monitoring drugs, food, and gas. Counterfeit factories flourished, but surprisingly, this led to an increase in sales for high-end products in the years that followed.

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When most people think about the effect of counterfeits on legitimate brands—and when brands themselves litigate against counterfeiters—they focus on the "business stealing" effect: Every fake Prada handbag represents a lost sale for Prada. 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.

Measuring the net effect of counterfeiting, though, is a tricky matter. If Prada sales increase alongside counterfeit sales, is that because fakes provide valuable advertising? Or could the sales increase merely indicate higher demand for Prada products, both real and fake? It's impossible to say. The genius of Qian's approach is that she found what amounted to a random jump in counterfeiting activity that resulted from events entirely unrelated to the apparel industry. In the early 1990s, a string of quality-control problems among food, drug, and gas-tank producers in China made headlines around the world. Australian regulators documented salmonella and listeria contamination in Chinese food imports, and mercury and arsenic concentrations up to many times the legal limit. Stories of exploding Chinese fuel cans—often with fatal consequences—appeared with alarming regularity. And in 1994, the Wall Street Journal reported that "bogus medicines have flooded parts of China, causing deaths and disabilities." With the rising body count, Chinese authorities didn't have the time or the resources to keep close tabs on what was happening in handbag or sneaker factories. The Quality and Technology Supervision Bureau, tasked with ensuring quality standards as well as counterfeit enforcement, cut the budget for footwear oversight from 160 million yuan in 1994 to just over 40 million the following year.

To document the impact of this drop in enforcement, professor Qian put together data on production costs, sales, and retail prices for 31 brands with serious business in China, including multinational giants like Nike and Reebok and local favorites like Li-ning and Anta, each with Chinese market shares comparable to Nike's. She obtained similar figures for counterfeiters from QTSB and records seized from counterfeit factories by enforcement authorities.

With policing severely curtailed, counterfeiting took off in 1995—Qian estimates a nearly 100-fold increase in the production of fakes within just two years. If the flood of rip-off sneakers were crowding out sales of legitimate brands, you'd expect to see a corresponding drop in their business. Indeed, after stripping out the effects of the generally booming Chinese economy, which was producing more of everything in the 1990s, Qian did find a steep drop in sales of branded products—but only among low-end product lines. Top-of-the-line items actually saw an uptick in sales between 1994 and 1996, even as counterfeit sales took off.

The copies of low-end items—produced with cheap fabric on cheap, locally made machinery, were scarcely different from the real deal, which were also produced with cheap fabric on cheap machinery. So it's easy to understand why consumers might opt for the lower-cost counterfeit. It's a lot harder to make vinyl look like alligator skin, or to replicate the precision of imported Italian equipment. High-end products were therefore insulated from the encroachment of cheap copycats.

Qian's findings do not suggest that Nike, Reebok, Prada, or Louis Vuitton should be any less tenacious in going after counterfeiters. According to Gosline Richardson, one reason why customers upgrade from Canal Street imitations to the genuine article is the twinge of guilt that comes along with engaging in back-alley counterfeit purchases. If there were less legal sanction against counterfeits, it might diminish those feelings of guilt among consumers.

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.

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Ray Fisman is a professor of economics at the Columbia Business School and co-author of The Org: The Underlying Logic of the Office. Follow him on Twitter.

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