Application of blockchain in the secondary market with counterfeiting

Abstract

It is not uncommon for customers who intend to buy a used product in the secondary market to end up with a counterfeit because they have imperfect information about product authenticity. Blockchain is being piloted as a cutting-edge solution to this challenge. We use a two-period game to study the impact of utilizing blockchain to combat counterfeit products in the secondary market. We show that, even when the cost of implementing blockchain is negligible, the manufacturer can be better off incurring reputation damage than adopting blockchain. Further, the used goods reseller can be worse off from blockchain, even though that seller is not responsible for the implementation cost and benefits from blockchain’s signaling capability. We also demonstrate that the counterfeiter can benefit as a result of blockchain. When the quality of a fake product is sufficiently low, blockchain lowers consumer surplus. The winning situation of blockchain between the manufacturer, reseller, and customers is achieved only when the fake product is of intermediate quality. Blockchain can be powerful in situations when used products have a low perceived quality; otherwise, blockchain may not be ideal.