Combating copycatting from emerging market suppliers in global supply chains
This article is about protecting global manufacturers from supplier plagiarism common in emerging markets (protecting intellectual property rights). Consider a manufacturer selling products in an emerging market. If outsourced, there are intellectual property risks. Manufacturers or emerging market governments will conduct enforcement efforts to protect IP property rights in the supply chain.
The results indicate which lower-risk tasks manufacturers should outsource under certain circumstances when domestic production costs are too high. And, although suppliers are targets of enforcement, manufacturers' enforcement efforts may benefit suppliers and harm consumers and the marketplace.
When considering whether the government or the manufacturer should undertake enforcement efforts, the article believes that when the manufacturer is a weak brand, the government should make efforts. And when the manufacturer is a strong brand, the manufacturer should make efforts.
Model part:
A global manufacturer selling products to consumers in emerging markets. Assuming that the task of manufacturing a product is divisible, theta represents the complexity of the task, uniformly distributed between 0 and 1. The manufacturer's outsourcing strategy is phi. For tasks with complexity theta between 0<theta<phi (simple type), it will be outsourced, and for tasks with higher complexity between phi<theta<1, it will be manufactured by itself ( knowledge intensive).
cost
Cost of production
The manufacturer will have a cost disadvantage if it produces by itself. The standardized supplier's cost of performing task theta is 0, and the manufacturer's cost of performing task theta is f1(theta)>0.
The total cost borne by the manufacturer for its own production is the integral of f1(theta) at phi<theta<1.
knowledge transfer cost
The supplier needs knowledge to perform the task, so the manufacturer's cost of imparting the knowledge required for the task to the supplier is f2(theta).
Therefore, on outsourced products, the cost that the manufacturer will incur is the integral of f2(theta) at 0<theta<phi.
Knowledge transfer may differ between industries. Knowledge transfer costs are higher in the autonomous vehicle industry than in the apparel industry.
Assume that the manufacturer's own production costs for each task are f1(theta)=c. Knowledge transfer costs depend on the complexity of the task. f2(theta)=k1*theta.
Suppliers need to decide whether to enter the market as a counterfeiter copying products produced by manufacturers. E=1 means entry. E=0 means no entry.
imitation cost
If a supplier wants to enter the market, it needs to complete all the tasks required to produce a fake.
Because the supplier already knows how to perform the simple parts of the tasks that are outsourced to him, he only needs to learn how to perform the tasks that are not outsourced. Assume that the cost he needs to imitate this part of the task is f3(theta).
The total imitation cost of the supplier is the integral of f3(theta) at phi<theta<1. The more difficult the task, the higher the imitation cost, so f3(theta)=k2*theta.
quality
The two products have different brand qualities. The manufacturer's products have brand quality b>1. The brand quality of the supplier's products is standardized to 1.
However, the consumer quality of both products is the same because they use similar raw materials.
Of course, if the consumption quality is different, b can also be interpreted as the sum of brand quality and consumption quality.
consumer utility
The utility of consumers buying manufacturer's products is UM=bv-pM; the utility of consumers buying fakes is US=v-pS. (The expansion also takes into account the situation that some consumers will only buy the manufacturer's products)
need
Therefore, if the supplier does not occupy the market (do not enter the market as a counterfeiter), the consumer demand function is:
Demand for genuine goods: QM=v at Points on UM>0.
If the manufacturer invades the market and enters the market as a counterfeiter, the consumer demand function is:
Demand for genuine goods: QM=v at UM>0 and UM> Points on US.
Demand for fake goods: QS=v points on US>0 and US>UM.
profit
The wholesale price is w.
If the supplier chooses not to occupy the market, the manufacturer's profit is (pM-w)QM-QM Own production cost - knowledge transfer cost; the supplier's The profit is wQM.
If the supplier chooses to occupy the market, the manufacturer's profit is (pM-w)QM-QM Own production cost - knowledge transfer cost; supplier's profit It is wQM+pSQS-imitation cost.
It can be found here that the production cost is the unit production cost, because the higher the output, the higher the production cost. Knowledge transfer and imitation only need to be done once and do not change with changes in output, so they are fixed costs.
game order
In the first step, the manufacturer makes an outsourcing decision phi.
In the second step, the supplier decides w and whether to invade market E.
In the third step, the manufacturer decides the price pM.
In the fourth step, the supplier decides the price pS.
Base model: Manufacturer makes enforcement efforts.
Manufacturers can punish fakes, as Louis Vuitton and Gucci have done.
Enforcement efforts, enforcement costs
The law enforcement effort is e, 0<e<1, which indicates the probability of catching the counterfeiter after implementing the law enforcement effort. The cost is (lamda1*e^2)/2
If the supplier is caught using task theta to produce fake goods, it will pay a penalty f4(theta).
However, reverse engineering is allowed in some emerging economies, such as China.
fine
As a result, the total penalty is the total outsourced tasks. In other words, only tasks within 0<theta<phi will be fined.
Assume that the penalty amount for each task is fixed, which is F.
Manufacturers will engage in enforcement efforts only when suppliers choose to encroach on the market.
profit function
At this time, the profit function is:
The manufacturer's profit is (pM-w)QM-QMOwn production cost-knowledge transfer cost - Enforcement effort cost + e counterfeit fine; supplier's profit is wQM + pSQS - imitation cost - e * counterfeit fine.
research content
analyzes within what parameters (k and phi) a supplier should or should not encroach on the market, with or without enforcement efforts.
The impact of manufacturer enforcement is then analyzed.
Basic model: Government makes enforcement efforts
Enforcement efforts, enforcement costs
Because the manufacturer and supplier are not located in a foreign country, it may be cheaper for the government to enforce the law, lamda2<lamda1.
The enforcement cost corresponding to its enforcement effort e is 1/2lamda2e^2.
compensation
If the government catches it, then the manufacturer can also get a part (1-beta) compensation.
profit function
Therefore, under government enforcement at this time, the profit function is:
The manufacturer’s profit is (pM-w)QM-QMProduced by oneself Cost-knowledge transfer cost+e(1-beta) fine for fake goods; supplier's profit is wQM+pSQS-cost of imitation-e fine for fake goods . The government's profit function is social welfare: CS + supplier's profit - enforcement effort cost + betacounterfeit fine.
game order
Government decision-making and enforcement efforts e.
Then the other order is the same as the basic model.
research content
Then the effects of beta and lambda2 on e, phi, and w were analyzed.
Compare the changes in e and phi under government enforcement and manufacturer enforcement.
Compares the changes in manufacturer's profit and supplier's profit under two types of law enforcement and different parameter ranges (lamda1).
Compare the changes in consumer surplus and social welfare under two types of law enforcement and different parameter ranges (lamda1).
Model extension
Extension 1: Model the wholesale price w in a different way.
Consider w is determined based on tasks. The w corresponding to task theta is f4(theta)
Therefore, the wholesale cost paid by the manufacturer to the supplier changes from QMw to QM (integral of f4(theta) on 0<theat<phi).
Extension 2: Multi-source outsourcing.
Previously, it was assumed that the manufacturer would only outsource to one supplier. Here, consider that the manufacturer can outsource from multiple sources.
There is also a supplier S2, which is also in an emerging economy country.
When the manufacturer decides phi, simple tasks are given to S2 (0<theta<phi/2), and more complex tasks are given to S (phi/2<theta<phi).
Each supplier can choose whether to occupy the market. The quality of S2's fake is sigma<1, so the imitation cost is S's imitation cost*sigma.
The cost difference of S2 relative to S is delta.
Extension 3: Government legislation
If the government undertakes legislative effort l, its cost is 1/2lamda3l^2, which can bring to manufacturer enforcement effort e The law enforcement success rate of (1+l)*e.