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High-end companies the most vulnerable to counterfeiters

In Canada, the value of trade in fake and pirated goods is estimated at $20-billion to $30-billion annually, according to Canadian Manufacturers & Exporters, a trade organization.

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The Globe's latest report on research from business schools.

From food and high-end fashion to pharmaceuticals, toys, cosmetics and electronics, there's no shortage of counterfeit products out there for shoppers to choose from.

It seems no sooner does a company bring a new product to market than it is besieged by intellectual property pirates offering up a knock-off that looks just like the original – only it's cheaper.

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Consumer behaviour is only adding to the problem. The practice of IP piracy is so common in the retail space that many of us are willing to forgo the original product altogether in anticipation of the copycat we know will eventually hit the shelves.

So what's a creative manufacturer to do to maintain its margins and stay afloat in these turbulent seas?

Enter researcher Hubert Pun to offer what he hopes are tangible solutions to copycatting.

The assistant professor at the University of Western Ontario's Ivey Business School has been working on the problem with Gregory DeYong, an assistant professor at Southern Illinois University. Their first paper is published in Manufacturing & Service Operations Management, a U.S.-based journal.

"This research focuses on how the authentic manufacturer is affected by the product quality, and the customers' purchasing behaviour," Dr. Pun says in an e-mail.

Here's what they've learned:

– Firms with a lower-quality product are less likely to face a copycat. Thus, they can discourage copycats by reducing the product price and cutting advertising budgets. The end result is a market that is left unattractive to the copycat.

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– Firms with a higher-quality product are more likely to be targeted. In this case, the manufacturer might profit from ceding the low-end consumers to the copycat, while leaving the option to aggressively pursue copycats through legal or government avenues.

The researchers also found that encouraging a "buy now" mentality among consumers can be counterproductive, as IP pirates are more likely to enter the market when customers do not anticipate the future availability of the original product.

While this sounds like a good strategy to deter copycats (if the customers buy before the copycat product is available, this should reduce the threat of copycats), the benefits only extend to a certain point, Dr. Pun cautions. In cases where customers already have a propensity to purchase early, a further increase in a "buy now" mentality may force the manufacturer to reduce prices in the future to attract the remaining customers who did not purchase earlier.

For Dr. Pun, the research topic hits close to home. In Canada, the value of trade in fake and pirated goods is estimated at $20-billion to $30-billion annually, according to Canadian Manufacturers & Exporters, a trade organization. In 2015, the federal government reported that software piracy alone costs more than $730-million.

That's compounded by what Dr. Pun considers "very lax laws" with respect to counterfeiting, adding, "As a result, enforcers find it difficult to effectively carry out their mission."

He notes the Office of the United States Trade Representative (USTR) places Canada on its "watch list" of countries that offer the weakest protection for intellectual property rights.

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"Canada's current IP policy is hurting Canadian manufacturers," he says. "Since the fake products are often cheaper in cost, but also of lesser quality, piracy presents Canadian firms with unnecessary competition and costs for public awareness campaigns, investigation and prosecution."

Next up, the researchers intend to dive further into the topic with research that examines the phenomenon of copycatting by product suppliers, whose easy access to original IP is eating away at companies like Canadian home decor manufacturer Umbra, which recently discovered that some of the overseas factories contracted to make its products are copying the designs and are selling the knockoffs. Umbra has also discovered that some factories that make the copycat products are operated by relatives of the factory owners where Umbra outsources production.

That research is expected to be completed by 2018.

Story ideas related to business school research in Canada can be sent to darahhansen@yahoo.ca.

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