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Analysis of the demand for counterfeit goods ArticleinJournal of Fashion Marketing and Management · March 2011 DOI: 10.1108/13612021111112322

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Counterfeit goods

Analysis of the demand for counterfeit goods Pamela S. Norum Department of Textile and Apparel Management, University of Missouri, Columbia, Missouri, USA, and

Angela Cuno Northcentral University, Prescott Valley, Arizona, USA

27 Received March 2009 Revised October 2009 Accepted February 2010

Abstract Purpose – The production, distribution and consumption of counterfeit goods have been increasing at an alarming rate. Current legislation addresses the supply side of the problem, but not the demand side of the problem. The purpose of this paper is to examine, empirically, factors affecting consumer demand for counterfeit goods were analyzed. Design/methodology/approach – The economic theory of consumer demand provided the theoretical framework. Data were collected from students enrolled at a major mid-western university, and logistic regression was used to estimate demand functions for counterfeit goods. Findings – The results indicated that student sensitivity to the counterfeit problem did not significantly deter the purchase of counterfeit goods. Research limitations/implications – Educators in textiles and apparel should have a vested interest in providing education about counterfeiting, resulting in students with greater sensitivity to the issue. Originality/value – The production, distribution and consumption of counterfeit goods have been increasing at an alarming rate. Current legislation addresses the supply side of the problem, but not the demand side of the problem. Consumer education may be a feasible approach for addressing the demand side of the problem. Keywords United States of America, Consumer behaviour, Counterfeiting, Fashion, Demand model Paper type Case study

Introduction A global trend that has been increasing at an alarming rate is the production, distribution and consumption of counterfeit goods. In spite of legislation intended to reduce the sale of counterfeit merchandise, industry leaders and designers all over the world have identified this as a growing problem, and are working with groups such as the International Anti-Counterfeiting Coalition (IACC) to protect their designs from being copied. The IACC (2008) estimates that 5-7 percent of world trade is in illegitimate goods. Trade in counterfeit goods has reached $600 billion annually on a worldwide basis. This problem has grown over 10,000 percent in the past 20 years, partly due to an increase in consumer demand. In the USA, counterfeiting costs businesses up to $250 billion each year. The highest profile counterfeit investigations and prosecutions have focused luxury goods. Often times these products are sold by street merchants and vendors at mall kiosks. Counterfeit handbags are the most widely copied product. Kate Spade Journal of Fashion Marketing and Management executives believe that the sales ratio of real bags to counterfeits is one-to-one. Vol. 15 No. 1, 2011 Counterfeit luxury items have become a multi-million dollar business for traffickers pp. 27-40 Limited because of the commonplace acceptance of counterfeit purses in our society and theq Emerald Group Publishing 1361-2026 DOI 10.1108/13612021111112322 sophisticated strategies for evading state or federal agents (Amendolara, 2005).

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To deter counterfeit goods, Congress passed the Trademark Counterfeiting Act (TCA) of 1984. Up to this point in time, penalties for counterfeiting were minimal and did not prevent counterfeiters from trafficking goods into the USA. Under the Trademark Counterfeiting Act, any corporation or individual who is found guilty of intentionally trafficking counterfeit goods risks a maximum penalty of one million dollars and/or five years imprisonment (Amendolara, 2005). The Trademark Counterfeiting Act of 1984 was a giant leap towards the protection of trademarks. However, without bilateral action from countries that value trade relationships with the USA, it cannot be completely successful. In addition, this legislation does not address the demand side of the problem. The demand side of the counterfeit problem is clearly an issue of consumer behaviour, or perhaps more appropriately termed, “consumer misbehaviour” (Albers-Miller, 1999). With legislation, such as the TCA, the focus is on deterring the suppliers and sellers of counterfeit goods, but not the consumers, or ultimate purchasers of the goods. There are limited legal ramifications for consumers of counterfeit goods. However, in recent years, with the growth in trafficking of counterfeit goods, greater interest in understanding consumer behaviour with regard to purchasing counterfeit goods has developed. This shift has occurred because without the demand, there would be no need for the supply. Legal consequences and consumer education are both options for addressing the demand side of the counterfeit issue. Educators in textiles and apparel, in particular, have a responsibility to educate their students about the counterfeit industry, and its consequences. Singhapakdi (2004) indicated that sensitivity to an issue would reduce the likelihood of engaging in a negative or unethical behaviour. If this is true, then one would expect that textile and apparel students would be, or should be, sensitive to the counterfeit issue and less likely to engage in it. Prior research has shown that consumer’s ethical attitudes can affect the likelihood of purchasing counterfeit goods (Muncy and Vitell, 1992). Economic benefits can also drive the demand for counterfeit goods (Bloch et al., 1993; Dodge et al., 1996). In addition, socio-economic and demographic characteristics also influence purchasing behaviour. The purpose of this study is to gain a better understanding of selected factors affecting consumer demand for counterfeit goods. Given the role that textile and apparel educators in higher education could play in addressing this issue, college students are the focus of the study. The primary objectives are to: . determine whether consumer attitudes towards counterfeiting differ between purchasers and non-purchasers of counterfeit goods; . determine if consumer attitudes regarding the legal/ethical aspects of counterfeiting influences the purchase of counterfeit goods; . identify whether sensitivity to the counterfeit problem affects purchase behaviour; and . examine the effect of selected socio-economic and demographic characteristics on the demand for counterfeit goods. Background Attitudes By almost any standard, US consumers are viewed as being very materialistic. The desire to own possessions can lead to a consumer acting unethically in order to obtain

the possessions they desire. To study the ethical beliefs of consumers, Muncy and Vitell (1992) developed and administered a consumer ethics scale which measured consumer practices that have ethical implications. Consumer ethics can be defined as the moral rules, principles and standards guiding the behaviour of an individual (or group) in the selection, purchase, use or selling of a good or service. Based on their sample of 1,900 heads of households within the USA, Muncy and Vitell’s respondents tended to believe that it was more ethical to passively benefit in some way than to actively benefit from an illegal activity. According to the study, the “no harm no foul” activities were considered to not be unethical. Many of these activities included intellectual property rights such as the copying of software, tapes, or movies. Tom et al. (1998) investigated consumer attitudes toward counterfeiting on several different dimensions, measuring attitudes about the economic, legal, anti-business, and quality aspects of counterfeiting. In this study, approximately, 40 percent of the 129 respondents had knowingly purchased counterfeit goods. Purchasers had more lax attitudes about the lawfulness of counterfeiting, were less likely to believe that counterfeiting hurt the US economy, held greater anti-big business sentiments, and perceived the quality of counterfeit goods to be as good legitimate goods. Ang et al. (2001) surveyed a total 3,621 respondents, aged 15 and above, who had purchased CDs in the past. The results indicated that one’s attitude towards piracy was a significant predictor of one’s purchase intentions. Consumers who have bought pirated CDs before had more favourable views about counterfeit goods than those who have never bought counterfeit products. Buyers and non-buyers alike did not consider anything wrong with purchasing counterfeit goods. Hunt and Vitell (1986) argued that the perception of an ethical issue or problem is an important prerequisite for the ethical decision-making process. A person who perceives an ethical problem more readily tends to behave more ethically than an individual who does not. A study of students in marketing classes from two major universities found that perceived ethical problems and perceived importance of ethics have a positive impact on the ethical intentions of students (Singhapakdi, 2004). The results of this study concluded that a marketing student’s perceived importance of ethics is a significant predictor of one’s ethical intentions. Gender differences Early studies found gender to be unrelated to ethical behaviour, ethical problems, and reasonable alternatives to resolving ethical problems (Hegarty and Sims, 1978; Singhapakdi and Vitell, 1990) whereas more recent studies indicated gender differences. Recent studies have concluded that female students tend to be more ethical in their intentions than male students (Singhapakdi, 2004) and more accepting of questionable ethical responses (Cole and Smith, 1996). Kwong et al. (2003) found gender and age were significantly related to the intention to buy pirated CDs, with male respondents more likely to purchase counterfeit CDs than were female respondents. A study conducted by Chen and Tang (2006) examined business and psychology students’ attitudes toward unethical behaviour and the likelihood of them engaging in unethical behaviour. The study found that male students tend to believe that theft, corruption and deception were more ethical than their female counterparts.

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Economic influences Past research has shown that direct economic consequences such as paying a lower price, influence the tolerance of questionable behaviour by consumers (Dodge et al., 1996). A study conducted by Bloch et al. (1993) found that consumers would select a counterfeit item over a genuine product when there is a price advantage. For their first study, 100 adult consumers were surveyed, using a mall intercept, to determine a consumer’s willingness to knowingly buy counterfeit apparel. Respondents were shown a set of three knit shirts (a designer label with a logo, a counterfeit of the designer label with a logo, and a store brand without a logo). Participants were made aware that of the products to choose from, one was counterfeit, and that counterfeit products are illegal. Prices were also associated with each shirt ($45.00 for the designer shirt and $18.00 for the other two shirts). The respondents were then asked to select the shirt they were most likely to buy. Of the 100 respondents, 29 percent selected the designer label, 37.5 percent selected the counterfeit shirt, and 33.5 percent selected the non-brand name shirt. When the study was repeated at a flea market, identical choice patterns were observed between the flea market and the local mall. Their results indicate that even though counterfeit products compromise the quality, consumers are willing to over look this due to the cost saving prices. The authors concluded that government and businesses must push to eliminate the demand-side of counterfeit. Without more research to determine how to target these consumers, and which appeal to use, dollars spent on reducing the demand-side of counterfeit will likely be wasted. A study conducted by Albers-Miller (1999) was designed to assess consumer’s misbehaviour, and what causes a consumer to buy illicit goods, using the following three variables to predict consumer behaviour: (1) the selling price; (2) the situation under which the purchase takes place; and (3) the risk associated with the purchase. The study showed that all respondents were more likely to engage in illicit behaviour if there was peer pressure to do so. While it has been shown that peer support of an illegal behaviour encourages deviant behaviour, peer rejection may also serve as a deterrent. Albers-Miller concluded that legitimate business managers should consider lobbying for the strict enforcement of criminal sanctions against consumers as well as merchants of illicit goods. Theoretical model Consumer demand theory Consumer demand theory provides the theoretical framework for this study. From this perspective, consumers maximize their utility subject to their budget constraint from which demand functions for various goods and services are derived (Varian, 1999). A consumer’s utility function is defined as: U ¼ uðX 1 ; X AOG Þ where X 1 ¼ good 1 and X AOG ¼ all other goods.

A consumer maximizes utility subject to its budget constraint: I ¼ P 1 X 1 þ P AOG X AOG where I ¼ total income, P 1 ¼ price of clothing, and P AOG ¼ price of all other goods. Maximization of the utility function subject to the income constraint yields the demand function for good one: Q1 ¼ f ðP 1 ; P AOG ; I ; TÞ where Q1 ¼ quantity demanded of good one and T ¼ tastes & preferences. The quantity demanded of a good is function of income, prices, and tastes and preferences (Varian, 1999). When using cross-sectional data, as in this study, prices are assumed to be constant across consumers over the time period of the analysis. Therefore, prices can be suppressed in the empirical equation. The empirical equation will include measures for income, and factors to control for tastes and preferences. Selected variables found to influence the demand for counterfeit goods (e.g. ethical attitudes, sensitivity, and gender) in previous studies will be included to measure tastes and preferences. Method Empirical model and analysis For this study, both simple t-tests and logistic regression are used for the analyses. To achieve the first objective, t-tests are used to determine whether differences exist between purchasers and non-purchasers of counterfeit goods with respect to their attitudes about counterfeiting. For the remaining objectives, a multivariate framework is used in order to analyze the effect of one variable while controlling for other factors that could influence demand. Information is not available on the exact quantity of, or expenditure on a counterfeit good. It is known, however, whether the consumer purchased a counterfeit good in the past year. Consequently, the dependent variable is a dichotomous variable, and logistic regression analysis is an appropriate statistical technique (Tacq, 1997). The general form of the equation estimated in this study is: CF ¼ a þ b1 I þ b2 A þ b3 S þ b4 S þ b5 Y þ e where: CF ¼ Counterfeit good purchase I

¼ Income

A ¼ Attitudes S ¼ Sensitivity G ¼ Gender Y ¼ Year in school a

¼ the intercept

b i ¼ regression coefficient e

¼ error term

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Table I. Logistic regression indicating counterfeit purchasing including class discussion

The coefficients produced by the logistic procedure cannot be interpreted in the same way as the regression coefficients from ordinary least squares regression. However, the odds ratio provides coefficients that represent the effect of changes in the independent variables on the dependent variable. In this context, the coefficient on a dummy variable can be interpreted as a percent difference relative to the comparison variable. For each set of dummy variables, there is an omitted category that serves as the comparison category. It is assigned a value of 1.00, or it can also be multiplied by 100 to get 100 percent). The value on the odds ratio is compared to the 1.00 (or 100 percent) by taking the difference between the values. For example, in Table I, the omitted category for parental income, shown in parentheses, is for parental income less than $25,000. Thus, all other income categories will be compared to the ,$25,000 category. If an odds ratio is greater than 1.0 (or 100 percent), it indicates that students with that level of parental income are more likely to buy counterfeit goods. For parental income of $100,000 or more, the odds ratio is 1.36 (or 136 percent). It indicates that students with parental income in this bracket are 36 percent more likely to buy counterfeit goods than students with parental income under $25,000 (1:36 2 1:00 ¼ 0:36 £ 100 ¼ 36 percent or 136 percent 2 100 percent ¼ 36 percent). On the other hand, a coefficient of 0.92 for parental income of $50,000-74,999 indicates these students are 8 percent less likely to buy counterfeit goods compared to students with parental income under $25,000 (0:92 2 1:00 ¼ 20:08 £ 100 ¼ 28 percent or 92 percent 2 100 percent ¼ 28 percent). The choice of omitted category for each dummy variable is discussed below under the variable definitions, and shown in parentheses in the tables. Variable

Parameter estimate

Intercept

1.78 * * *

Standard error

Odds ratio estimate

0.56

Income ,$25,000 $25,000-49,999 $50,000-74,999 $75,000-99,000 $100,000 or more Counterfeit buyers Counterfeit sellers

20.25 20.08 0.26 0.31 20.31 * * 20.28 * *

0.51 0.39 0.36 0.29 0.14 0.13

0.78 0.92 1.30 1.36 0.73 0.76

Sensitivity (Didn’t discuss in class) Discussed in class

20.14

0.10

0.87

Gender Female Male

20.22

0.24

0.81

Education Freshmen Sophomore Junior Senior/graduate student

20.51 * 20.90 * * * 20.88 * *

0.28 0.34 0.35

0.60 0.41 0.42

Notes: * p , 0.10; * * p , 0.05; * * * p , 0.01; n ¼ 437

Sample and data collection To collect data for this study, students enrolled in a major university located in a medium-sized Midwestern town were asked to complete a questionnaire. The questionnaire was administered to seven classes. Convenience sampling was used with the intent of trying to have a wide representation of students from across campus. Four classes from a textile and apparel department were chosen based on the assumption that these students were more likely to have been exposed to the negative aspects of purchasing counterfeit goods, compared to other students. They were also selected since the behaviour of these students would be of most direct relevance to textile and apparel academicians. However, in order to ensure a diverse sample of students, the surveys were also administered to two large classes, Principles of Microeconomics and Introduction to Sociology and one small class, Introduction to Astronomy. These classes were selected based on their class sizes, different educational levels, and/or representation of students from many different departments throughout campus. A total of 517 students responded to the questionnaire. However, to be included in the analyses, the students had to provide complete information on the varia...