On the Use of Overt Anti-Counterfeiting Technologies
Time：June 18th (Thursday) 2pm-4pm
Location: Zhifuxuan, National School of Development, Peking U.
Speaker: Yuetao Gao, NUS
Many pharmaceutical companies use overt anti-counterfeiting technologies (OACTs), such as holograms, to fight counterfeiters. An OACT is usually implemented on the drug packaging, which makes it difficult for counterfeiters to produce convincing copies and easier for patients to tell the difference between authentic and counterfeit medicines. I show that there may be an inverted U-shaped relationship between the complexity of the OACT and the magnitude of counterfeit medicine purchases. The nature of this relationship is a consequence of an OACT engendering two opposing effects. On the one hand, adopting an OACT imposes a significant entry cost on counterfeiters, causing fewer counterfeiters to enter a dubious source; as a result, the drugs at this source have a greater chance of being genuine (a counterfeiters’ entry-dampening effect). On the other hand, more patients head to this dubious source owing to the increased chance of obtaining a genuine drug (a patients’ demand-enhancing effect). When the selected OACT is sufficiently complex to replicate, the former effect overrides the latter and the problem of counterfeit purchasing is relieved. However, when the OACT is not adequately sophisticated, the latter effect more than offsets the former. This leads to an anti-counterfeiting trap: the use of a rudimentary OACT may beget more counterfeit purchases. This result is consistent with the fact that despite enormous spending on the upgrading of OACTs in recent years, annual global sales of counterfeit drugs have actually risen. Additionally, I find that using an OACT results in higher prices for both counterfeit and authentic drugs. Furthermore, I demonstrate that, at the optimum, authentic firm may not use any OACTs if it does not change its original price, and may find it more profitable to employ a mediocre OACT if otherwise.