Collaborating with the Enemy? Sourcing Decisions in the Presence of Potential Counterfeiters

Problem definition: We investigate sourcing strategies of a brand-name firm facing two types of suppliers: a licit domestic supplier and an overseas supplier who potentially becomes a counterfeiter when not used as a supplier. Our study identifies the conditions under which a brand-name firm can convert the potential counterfeiter to a licit source.Methodology/Results: We employ a game-theoretic model to examine the interactions between the brand-name firm and its two suppliers. The analytical results show that when the perceived quality of the counterfeit is low, the brand-name firm always sources from the overseas supplier through either dual sourcing or single sourcing to combat counterfeiting. As the perceived quality of the counterfeit increases, the brand-name firm may fail to convert the counterfeiter to an overseas supplier and sources only from the domestic supplier. We demonstrate that the sourcing strategy of converting the counterfeiter to an authorized overseas supplier enables the brand-name firm to combat counterfeiting effectively even when the penalty for counterfeiting from law enforcement is low. We also examine the impact of such a strategy on consumer and social surplus, and find that it may hurt consumer surplus and does not always improve social surplus, especially when consumers find counterfeits attractive.Managerial implications: This paper considers an unconventional anti-counterfeiting strategy: sourcing from a potential counterfeiter and converting it to an authorized supplier. The results show that the collaboration between the brand-name firm and the potential counterfeiter via a sourcing contract can benefit both parties creating a win-win situation. This strategic lever can effectively combat counterfeiting and complement existing anti-counterfeiting measures, such as law enforcement and consumer education. In particular, it can be adopted by brand-name firms when they face counterfeiting threats in those markets where law enforcement is weak