An Economic Analysis of Counterfeit Goods: the Case of China

Abstract

The paper provides an economic analysis of two types of counterfeit goods under market equilibrium and under market failure respectively.  Section one answers why consumers demand fake goods, the counterfeiters’ incentives, dynamics of short-run equilibrium and changes in the long run.  Counterfeiting, as a market behavior, lasts as long as the pleasure from consuming and super profit from producing exist.  Section two analyzes six non-market factors behind the large-scale production in China. There are institutional, economic and social reasons that keep this illegal industry flourishing.  Measures improving these factors should be effective to prevent a crackdown on the industry.