Non-deceptive counterfeiting with brand dilution and network externalities: Beyond conventional beliefs

Non-deceptive counterfeiting involves producing and selling counterfeit products without misleading consumers about their authenticity. This practice intensifies price competition for genuine brands while contributing either to brand dilution or network externalities. Using a two-period game modeling approach, we analyze how genuine products should adjust their advertising and pricing strategies in response to non-deceptive counterfeiting. Our findings reveal that in the presence of brand dilution, manufacturers should reduce advertising investments and prices to remain competitive. However, when counterfeiting generates network externalities, the optimal response depends on market conditions and managerial effectiveness. In some cases, a survival strategy (reducing advertising and/or prices) may be necessary to maintain profitability. In other cases, a differentiation strategy (raising advertising and prices) can lead to profit gains. Regardless of the approach adopted, manufacturers must improve the targeting, content, and effectiveness of advertising to further differentiate their offerings and reduce positive spillover effects to counterfeit products.