Consumer Status Signaling, Wealth Inequality and Non-deceptive Counterfeits

Consumers often enjoy displaying luxury consumption to signal their private wealth status. The emergence of social media has fueled such desire for status signaling. Meanwhile, the rising of e-commerce has made it easy for consumers to search and purchase cheap non-deceptive counterfeits to send a ``fake'' status signal, posing a serious problem to the luxury (status product) industry. Motivated by these industry dynamics, we consider a market entry deterrence game between an incumbent status product firm (the firm) and a non-deceptive counterfeiter (the counterfeiter) who attempts to enter the market. A unique feature of our model is that the market demand is endogenously determined by a consumer status signaling subgame. We investigate the interaction among consumer status signaling, wealth inequality, and equilibrium market outcomes, as well as the implications of anti-counterfeit measures aimed at increasing the counterfeiter market entry cost. Our analysis yields three main insights. First, we show that without counterfeits, the firm is strictly better off from the heightened motive of consumer status signaling; however, such benefit would be neutralized by the potential counterfeiter entry. Second, we find that the presence of counterfeits lowers the firm's profit, but may induce the firm to raise its price. It may also increase social welfare, despite enabling a fake status signal. Third, we demonstrate that increasing the counterfeiter market entry cost may not completely eliminate counterfeiting insofar as the consumer status signaling motive and wealth inequality are high, in which case the firm would settle for strategic coexistence with the counterfeiter.