Implications of Counterfeit in a Common E-tailer Channel

Along with the growing prominence of e-commerce, counterfeiting business also shows a rapid growth in the online marketplace and has developed into a substantial threat to online retailing. Hence, reaching a clear understanding of the fundamental economic incentives behind the prevalence of counterfeits is of vital importance to both practitioners and academics. In this paper, we investigate the impact of counterfeiting in a distribution channel where both the brand seller and the counterfeiter sell their products through a common e-tailer and two distinct contract types -- wholesale contract and agency contract are considered in the study. We show that the entry of counterfeiters has a non-monotonic effect on both the brand seller's and e-tailer's profits, depending on consumers' informness and the production cost. Interestingly, we find that the e-tailer may favor the existence of counterfeits in her marketplace under the wholesale contract, while it is less profitable for the e-tailer to keep counterfeits under the agency contract due to the potential market expansion effect. This effect is further enhanced when the retail price of the counterfeit is strategically decided and then the e-tailer may also benefit from the the entry of counterfeiter under the agency contract. Overall, this study provides valuable insights on the true driving force behind the obstinate counterfeiting problem for dominate e-tailers in practice