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Devil wears Prada: How knockoffs boost brand sales

Prada's Toronto store, in this 2007 photo.

Charla Jones/Charla Jones/The Globe and Mail

Is imitation the sincerest form of flattery? Maybe. But that's cold comfort to firms that spend fortunes designing the next big running shoe or handbag only to see it knocked off in a matter of weeks.

Lookalike consumer goods, while often amusing in a kitschy way (BlockBerry or HiPhone anyone?) drive corporations to spend millions on legal bills and staffing, all in the name of "brand protection." Despite this, the multibillion dollar counterfeit industry continues to thrive.

Some solace: a new working paper from the National Bureau of Economics finds an upside to counterfeiting. Knockoffs may steal business, for sure, but they also act as a "potential advertising mechanism," writes Yi Qian, a marketing professor at Northwestern University.

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Prof. Qian analyzed data from 31 domestic and multinational shoe companies operating in China. The data included sales figures from 1993 to 2004, a key period when China shifted the focus of its intellectual property enforcement from fake fashion and footwear to hazardous materials. In the wake of a series of accidents caused by counterfeit agricultural products and gas tanks, Chinese resources dedicated to sniffing out counterfeit footwear plummeted from 12 per cent to 2 per cent.

The result? Counterfeiters surged into the footwear market, churning out fake Nikes and Pradas at an unprecedented rate.

But Prof. Qian's research suggests the impact on authentic shoemakers wasn't all bad. Sales of low-end branded shoes (think designer flats rather than high leg boots) declined 44 per cent after a fake version was introduced to the market. But sales of high-end shoes by the same company spiked 29 per cent. Sales of medium range shoes remained stable.

Part of this has to do with quality. High-end shoes tend to be harder to mimic by counterfeiters who lack the technology and machinery of authentic producers. When the quality gap between the counterfeit and real shoes is narrow, as in low-end branded products, customers are more likely to buy the fake.

But when it came to high-end shoes, the lookalike version had an "advertising effect." Customers who were exposed to the brand through knockoffs often bought the authentic item anyway, suggesting counterfeits actually recruited customers to the shoe company. This positive effect on sales lasted for a few years before it began to decline.

In separate surveys, Prof. Qian found that attitudes toward counterfeits played an important role in consumer behaviour. A number of respondents presented with images of authentic shoes and their knockoffs believed any brand worth counterfeiting must be famous and worth having.

"Brand is a guarantee for quality," said one. "I don't know this brand, but it should be good if it has counterfeit followers."

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Given this, Prof. Qian argues that enforcement against counterfeits should be directed at the lower end knockoffs. High-end counterfeiters could be tackled only at an advantageous point in the business cycle, when the advertising effect starts to wear off.

This would not only be beneficial to lower end authentic producers "but also privately efficient to the branded companies," she says.

So maybe imitation isn't so bad after all.

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