Sunday, August 7, 2011

NYC & LA | Counterfeit Goods

Counterfeit iPods etc. confiscated in Los Angeles
A November 2004 report by the New York City Comptroller's Office estimated that $23 billion was spent on counterfeit goods in NYC in 2003.

This was an estimate not just of counterfeit goods sold on NYC  streets, although such sales at the time were highly visible, for example up and down Broadway. The estimate also included:
  • Counterfeit goods sold in stores. 
  • Wholesale trade in NYC of counterfeit goods trans-shipped to places as far away as the Dominican Republic and Ohio. 
  • Out-of-town shipments. A raid on a Chelsea warehouse found a huge volume of counterfeit goods being packaged for shipment out of town.
  • Wholesale buying by out-of-town resellers. A Broadway warehouse was raided and found to be a major shopping center for wholesale buyers who brought their goods out in black plastic bags to load into waiting trucks.
It's not hard to hide in plain sight as a value-added counterfeiter in NYC. I was once included on a police raid targeting a small private house in Queens. A small group of people was making pirate CDs, packaging them in plastic "jewel cases" along with the usual inserts for delivery to retail CD sellers. The copying was done on up-to-date towers that could produce 20 copies from one master in a few minutes.

The cardboard boxes that the jewel cases came in were reused for shipment out, but the CD boxes remained, so it was easy to estimate the volume of CDs that were being shipped out. The empty boxes not yet trashed/recycled had contained hundreds of thousands of blank CDs.

An August 2011 "Nightline" story shows that Los Angeles has joined New York as a major trans-shipment and retail center for counterfeit goods. Counterfeit clothing and other branded goods are sold both on the street and in stores, to both retail and wholesale customers.

Counterfeiting may sound like a "victimless" crime, but it is not. When the goods are fake prescription drugs, fake sunglasses, fake auto parts or bootleg toys or food, they bypass certification or safety inspections. They also bypass sales taxes, which is a reason prices can be much lower than legitimate products. State and local governments are hard-pressed to pay for the services they provide and tax-evaders reduce revenues and force up the cost of collecting taxes.

The impact on brands is sometimes debated. Knockoffs can be described as promoting the products they try to duplicate. A parent may buy a knockoff for a young child. The extent of competition is determined by the cross-elasticity of demand, i.e., the extent to which the knockoff is a complement to the genuine item or is a substitute:
  • If it is a substitute, sales of counterfeit goods harm sales of the genuine item. Example: Someone intending to buy a genuine Vuitton bag for a pre-teen daughter sees a vendor selling counterfeit bags and decides to save some money. This is a threat to the brands, because the availability ofthe counterfeit means that a sale of the genuine item was not made.
  • If it is a complement, sales of counterfeit goods do not harm sales of the genuine item. Example: A woman who has just bought a genuine Rolex watch on Fifth Avenue for herself, sees a vendor selling fake Rolex watches and buys one for her pre-teen daughter (she would never have purchased a genuine one because her daughter is likely to lose it). This is less of a threat to the brands.
Brands that do not spend money to track and expose counterfeiters are in danger of seeing their reputation tarnished. Why should a consumer buy a high-status watch if counterfeits are available at huge discounts on the street? The stakes posed by counterfeiting are high.