Competition in the Presence of Counterfeiters: The Case of Fines Imposed on Counterfeiters and Pocketed by the Genuine Firm

A firm sells a luxury product protected by conventional intellectual property rights (IPR) laws. However, a counterfeiter can illegally copy and sell the product without the permission of the brand-name producer. Fines are imposed on caught counterfeiters and pocketed by the genuine firm. Stackelberg equilibria resulting from the competition between the genuine firm and the counterfeiter are computed. It is shown that, whenever the production cost of the genuine item is not too low, then the genuine firm can benefit from counterfeiting presence. Furthermore, the amount of the fine and the level of enforcement that maximize the genuine company's profit is calculated.