Business Week (Feb. 7) has a cover story FAKES!, which describes the problems U.S. industry is having with counterfeit products, ranging from auto parts to fashion goods.

One major issue, of course, is quality. Brand names and trademarks are important precisely because they encourage investment in maintaining high quality and provide consumers with guarantees, and an inferior fake damages both consumers and the legitimate manufacturer.

But counterfeits are evil even if they are not inferior. A knock-off manufacturer avoids many of the costs involved in creating a product -- R&D, design, advertising, and risk of failure. By free riding on the creator, the knock-off can set a lower price -- at marginal cost, as a matter of fact. In the long run, the logical culmination of uncontrolled knockoffism would be that no one would make initial investments because these could never be recovered, and, barring some other mechanism of protection, production would stagnate.

The basics of the problem are very similar to the evils of unauthorized P2P downloading. The harm is not just in quality, though as MPAA and RIAA will happy to tell you, P2P can be a Trojan Horse for viruses and spyware. The more fundamental harm is that this mode of distribution does not bear a share of the overhead costs, which, in an investment-heavy world, is a road to disaster.

Many elements of the industrial world, especially in tech, have been slow to see that their interests and those of the content providers are akin. But perhaps the burgeoning problem of counterfeits will drive the point home.

posted by James DeLong @ 10:07 AM | Big Tent

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