Counterfeiting, enforcement and social welfare

This paper uses a vertical product differentiation model to discuss the influences caused by counterfeiting on prices and outputs of original products, consumer surplus and social welfare. We also explore the impact of the government's enforcement on counterfeiting and social welfare. We find that as counterfeiting may occur, sales of the original product could either increase or decrease. The welfare effects of government enforcement are shown as follows. First, a strict enforcement on counterfeiting by government may either increase or decrease welfare. Second, when counterfeiting emerges, welfare under a stricter enforcement is not necessarily larger than that without enforcement. Last, a strict enough enforcement can still improve welfare even if there is a relatively high enforcement cost.