Strategic counterfeit suppression on online platform: Considering network externalities and online consumer reviews in a two-period framework

Abstract

The presence of counterfeiters on online platforms often has detrimental effects on consumers, authentic sellers, and the platforms themselves, highlighting the need for effective anti-counterfeit policies. In addition, consumer purchasing behavior is influenced not only by price and quality but also by online consumer reviews (OCRs). In this paper, we examine a two-sided market scenario where authentic sellers and counterfeiters coexist on an online platform, and consumers can use OCRs to assess product quality. We construct a two-period model to investigate how anti-counterfeiting efforts and pricing decisions by the platform and sellers evolve over time, considering the impact of network externalities and OCRs. Our findings reveal that without OCRs, increased anti-counterfeiting efforts consistently align with changes in retail prices and authentic sellers' profits. Interestingly, with OCRs, the platform can adopt one of two strategies: “relaxed first, then strict” or “strict first, then relaxed”, each with its own benefits, and the platform's efforts to combat counterfeiters do not consistently increase, and platform profits are not necessarily compromised. Furthermore, we find that the online platform earns lower profits with OCRs than without them. Contrary to past literature, our study shows that sellers may benefit from OCRs when there is a significant reference effect or low production costs. Additionally, the comparison of social welfare across different scenarios reveals that OCRs do not always enhance social welfare.