As counterfeits persist, can brands win the game?

The ever-increasing protective measures by the brands and harsher penalties by authorities can sometimes stimulate more fakes entering the markets

Featured faculty: Zhu Kaijie
Written by Joanne Madrid

While innovation, craftsmanship and creativity have been praised as the force of modern industry, an intangible enemy is quietly lurking in the shadows. Counterfeits have aggressively spread across almost all industries, from luxury products, cosmetics, and drugs to electronics and even food and beverages, persistently traversing beyond borders.

The Organisation for Economic Co-operation and Development calculated that the value of counterfeit goods in 2021 was around US$467 billion, or 2.3 per cent of total global imports. The fake products increasingly mirror the look, feel and packaging of genuine brands, making them far more difficult for consumers to identify.

Companies have invested heavily in technologies such as microchips, machine-learning image checks, laser-etched micro-patterns, and many more to protect their brands. Governments have also ramped up their regulations and enforcement to protect consumers. Oddly, despite these efforts, fighting counterfeits has grown increasingly difficult.

“Advanced technologies empower companies, but also arm counterfeiters with the tools to create highly convincing fakes to mislead consumers,” says Zhu Kaijie, Professor in the Department of Decisions, Operations and Technology at the Chinese University of Hong Kong (CUHK) Business School. “Illicit manufacturers exploit technology through reverse-engineering techniques to mimic security features and undermine brand integrity.”

This battle of wits raises burning questions: How can brands optimise their anti-counterfeiting technologies, and how should authorities adjust their strategies? Professor Zhu’s latest study, Combating counterfeit products: Anti-counterfeiting technology and law enforcement, answers the above questions and explains why anti-counterfeiting defences often fail to stop the flood of fakes.

Understanding the rules of the game

In collaboration with Yao Shiqing of Monash University and Yang Ruina of Xi’an Jiaotong University, Professor Zhu developed a game-theoretic model that mirrors real-world dynamics among brands, counterfeiters, regulators, and customers. Game theory has been widely used in economics, business, and policymaking to analyse strategic choices, making it highly practical to address counterfeit issues.

In this model, counterfeiters always look for opportunities to make profits, real brands try to outsmart the counterfeiters, customers cannot tell real from fake, and authorities deploy measures to crack down on counterfeit products. The researchers then developed scenarios based on the existing literature on anti-counterfeit measures.

“Advanced technologies empower companies, but also arm counterfeiters with the tools to create highly convincing fakes to mislead consumers.”

Professor Zhu Kaijie

Brands usually fight counterfeits by leveraging technology, which counterfeiters can often replicate later, especially in places with active black markets where criminals sell not only fake goods but also counterfeit security labels. Authorities use law enforcement, but sometimes lack the resources and consistency to monitor the growing scale of fake markets.

Brands with no anti-counterfeiting technology will see their products easily imitated. When brands modestly increase anti-counterfeiting technology, counterfeiters will put more effort into getting around it and may even increase production to cover extra costs, as long as the profits outweigh the risks. In this case, brands can only win by making a significant technological leap that counterfeiters cannot catch up with.

Authorities can employ corrective and preventive approaches. Corrective enforcement is applied after counterfeit products have been sold, involving penalties and compensation to brand owners. Preventive enforcement involves factory inspections, warehouse checks, and pre-sale interventions to stop fake products before reaching the market. The researchers illustrate the model’s underlying assumptions and sequence below.

Why do anti-counterfeiting measures weaken over time?

Increasing penalties, such as legal actions and financial sanctions, can have two effects. First, higher penalties increase the risk associated with producing and selling fake products, making counterfeiting less attractive. Second, increased penalties signal a highly regulated market and motivate customers to purchase authentic products.

However, higher demand from customers will attract counterfeiters, who try harder to enter the market, increasing the likelihood of fakes despite high penalties. Although steep penalties theoretically can deter counterfeiters, in practice, law enforcement often lacks the resources needed to enforce them effectively. The brand eventually cannot rely solely on penalties and invests more in technology to tackle fake products.

In some markets, more substantial penalties may even diminish a company’s anti-counterfeiting efforts. Upon receiving financial compensation from the prosecuted counterfeiters, brands tend to rely on law enforcement to recover losses and cut back on anti-counterfeit measures, paradoxically weakening their counterfeit protection.

Lessons for consumers, companies, and investors

As there is no one-size-fits-all solution, Professor Zhu suggests that companies align with authorities closely. Such collaborations are essential, particularly because combatting counterfeiting is inherently complex and requires tailored strategies.

“The value of collaboration heavily depends on the coupling between the company’s anti-counterfeiting technology and law enforcement type,” he says. “As the companies and the government share the common goal of combating counterfeits, one might expect their actions substitute for each other. However, we find that the two function as complements, meaning that strengthening one measure can stimulate the other.”

For instance, Professor Zhu explains, companies with mid-range products like household appliances, toys, and consumer goods would benefit from reactive collaboration, where the authorities focus on corrective actions. This approach is more efficient and cost-effective, given that anti-counterfeiting technologies are less feasible for these products.

Firms offering high-end products, such as smartphones and computers, would gain more benefits from preventive enforcement, including authentication technologies, supply chain tracing, early detection systems, and close collaboration with regulators to block fakes before entering the market, rather than reacting after the fakes are sold. This approach will boost confidence in the market and enhance customer trust.

Brands should also keep investing in anti-counterfeiting technologies to help customers distinguish genuine products. This investment needs careful evaluation and regular updates, as these technologies often become accessible to counterfeiters within months.

The advancement of counterfeiting technology has led to the adoption of blockchain verification systems to ensure product authenticity. The Aura Blockchain Consortium, for instance, issues digital certificates for luxury goods, making it harder for counterfeiters to tamper with ownership records or forge product histories.

“The recent advancement in applying artificial intelligence or AI to intellectual property rights protection further strengthens the potential of preventive enforcement,” says Professor Zhu. “AI-based intellectual property analytics can uncover relationships, trends and patterns of intellectual property infringement, enhancing early detection and targeted intervention.”