Counterfeiting and anti-counterfeitingof software and content

Abstract

We address a counterfeiter who pretends to be the legitimate producer of software or content, charges the same price as the latter and competes with her in the same market. We examine the legitimate producer's joint determination of the profit-maximizing price and intensity of monitoring the counterfeiter's illegal activity. Our approach involves an explicit solution of the profit-maximizing level of counterfeiting, based on a real probability of detection function. The analysis reveals that the profit-maximizing price is lower than the price set in the absence of counterfeiting and must be accompanied with some minimum level of monitoring to be positive. Depending on the level of counterfeiting, the profit-maximizing monitoring rate may rise or fall with an increase in the penalty rate or in the legitimate producer's share in the counterfeiter's fine and back payments, and may counter-intuitively rise with improvements in detection technology.