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Counterfeits are illegal and are usually inferior-quality imitations or replicas of authentic goods, typically ones carrying a high brand value (Lai & Zaichkowsky, 1999). They provide benefits to individuals who wish to be fashionable and maintain a positive sense of self but are unwilling to pay for the higher-cost genuine versions. Yet, counterfeit consumption may undermine the image of the authentic brand and decrease sales. However, some counterfeited brands, such as Nike, opt to take a relatively passive role in combating counterfeits; some even embrace them since they believe that the market for counterfeit goods does not cannibalize the market share of the genuine products.

These competing strategies motivate us to explore how counterfeit usage impacts consumers' purchase intention of the original brands. On one hand, counterfeit consumption can reduce demand for genuine products or brands and dilute perceptions of the genuine product (Wilcox et al., 2009). Yet the widespread trade in the counterfeit market might actually help raise brand awareness and even demand for genuine products (Nia & Zaichkowsky, 2000; Wang, Wu, et al., 2023). Wilcox et al. (2011) demonstrated that, under certain levels of construal, the presence of counterfeits increases the desire of consumers for acquiring original brands. So, it appears that there may be situations when counterfeit products may benefit or harm the image and equity of the original, genuine luxury brands. Now, the existing literature (viz., Wilcox et al., 2011) has focused on cognitive or information processing differences such as consumers' level of construal as a moderator which reveals that “when consumers process at a concrete level, they contrast the genuine brand with the counterfeit version, which increases their desire for the genuine version. When consumers process at an abstract level, they assimilate the genuine brand toward the counterfeit version, which reduces their desire for the genuine version.” It is likely that there are situations where counterfeits benefit genuine products and other situations in which counterfeits harm genuine brands.

The luxury goods market is tipped to grow to £1trillion in global sales by 2010. With the top luxury brands enjoying operating margins of 60%-70%, it’s not hard to see why many marketers view counterfeit products as the biggest threat to these brands.

In reality, they are no such thing. The first flawed assumption is that a consumer who buys a fake would have otherwise purchased the genuine article – this is hogwash. A woman does not buy a Hermès Birkin bag for £10,000 because she needs a handbag. She wants the brand and for all the utilitarian verisimilitude of a £200 copy from Shanghai, this is something even the best fakes cannot offer.

The present research demonstrates a novel driver of the growing demand for counterfeit luxury goods: perceptions of income inequality. Across five studies, using different samples and counterfeit luxury goods, we find that as perceptions of income inequality increase, consumers value counterfeit luxury products for their “egalitarian value”—a value associated with counterfeits' perceived ability to restore equality in society. Consumers perceive both public and private counterfeit luxury goods to have egalitarian value, suggesting that their value manifests itself beyond consumers' attempts to signal status via consumption. Moreover, the egalitarian value increases consumers' motivation to purchase counterfeit luxury goods beyond their hedonic, utilitarian, economic, or status signaling value. Finally, the positive effect of the egalitarian value of counterfeit luxury goods on purchase preference is greater among consumers who think equality is more desirable and attainable (i.e., those low in social dominance orientation). Our results outline one psychological mechanism underlying consumers' interests in counterfeit luxury goods, explaining how egalitarian value may link two important societal issues: growing income inequality and increased demand for counterfeits. INTRODUCTION Income inequality reflects the extent to which wealth and income are unevenly distributed across members of a society (International Monetary Fund, ). It can both be objectively measured (Gini, ) and subjectively experienced (Schmalor & Heine, ). Though some may recognize a persistent income gap between the rich and the poor, inequality may also be situationally salient, such as when one walks past homeless people on the way to shop in high-end boutiques or drives past mansions on the way to their social housing. Research finds that income inequality affects individuals' well-being and behaviors (Schneider, ), increasing concerns for fairness and equality (Oishi et al., ), and motivating strategies to restore equality in social institutions (Ordabayeva & Lisjak, ). Equality-driven motivations influence both citizenship decisions, such as endorsing tax redistribution policies (Chow & Galak, ; Goya-Tocchetto & Payne, ), and consumption decisions, such as supporting businesses that are egalitarian oriented (Acar et al., ; Ordabayeva & Lisjak, ) or rejecting businesses that perpetuate inequality (Hagerty et al., ). These behaviors imply that consumer ideologies—the ideas and ideals that consumers hold regarding the marketplace (Schmitt et al., )—underpin decisions to reduce income inequality. The present research investigates if conditions of income inequality influence decisions to buy counterfeit luxury goods, and whether those decisions are undergirded by counterfeits' perceived ability to reduce inequality in the marketplace. THE EGALITARIAN VALUE OF COUNTERFEIT LUXURY GOODS Counterfeit luxury goods are manufactured to resemble legitimate luxury branded goods but are typically lower-priced. The global market for all counterfeit goods was estimated at $1.8 trillion USD in 2020, leading to $98 billion USD losses for luxury consumer brands specifically (Global Brand Counterfeiting Report 2018–2020, ). The growth of the counterfeit market is driven in large part by consumers' demand (Bloch et al., ), highlighting the importance of understanding factors that affect the preference for counterfeit luxury goods. We argue that an antecedent of the demand for counterfeit luxury goods is consumers' perceptions of income inequality (interchangeably: “perceived inequality”). Though income inequality restricts access to luxury markets to a few wealthy consumers (Gabszewicz & Thisse, ; Veblen, ), counterfeit luxury goods remain accessible to a wider range of “normal” consumers. By democratizing access, counterfeit luxury goods may be seen as undermining the hegemony of luxury markets (Amaral & Loken, ). Indeed, some consumers consider counterfeits as emblematic of the “little guys who fight big businesses” (Tom et al., , p. 408). Thus, under rising income inequality, counterfeit luxury goods may level the unequal playing field of luxury markets, creating more egalitarian conditions that undermine the exclusivity of luxury goods. We term this value the egalitarian value of counterfeits. By ostensibly creating more egalitarian conditions in exclusionary luxury markets, counterfeit luxury goods provide symbolic adjustments to the structure of unfair social institutions (c.f. Borge & Rattsø, ; Kuziemko et al., ; Ordabayeva & Lisjak, ), allowing consumers to address inequality through consumption. Guided by consumers' ideals about the market, consumption decisions may “affirm” the market, by accepting or engaging with activities that reinforce existing conditions, or “reject” the market, by avoiding or taking actions to alter existing conditions (Schmitt et al., ). Rather than serving as an alternate and relatively cheap source of status-signal that “affirms” the existing hierarchy in the luxury market (Wilcox et al., ), we argue that counterfeit luxury goods may be used as a means of “rejecting” the existing market conditions (Schmitt et al., ) and resisting exclusionary institutions (Bourdieu, ) under rising income inequality. Supporting the posited relationship between income inequality and demand for counterfeits, we conducted a Google Search Trends analysis (2013—2022), finding positive correlations between searches for counterfeit luxury brands (e.g., “replica Rolex”, “fake Gucci”) and existing levels of income inequality (Gini coefficients) in the US states where the searches took place (ps <0.001: Methodological Detail Appendix-I; hereafter ). Motivated by this relationship, we examine whether the egalitarian value of counterfeit luxury goods is an underlying mechanism, linking income inequality to counterfeit purchases. We posit that the egalitarian value of counterfeit luxury goods increases the purchase of counterfeits. But the strength of this effect may further depend on consumers' ideologies regarding the desirability of social equality. Social Dominance Orientation (“SDO” hereafter) reflects individuals' “degree of preference for inequality among social groups” (Pratto et al., , p. 741). Consumers with low [high] SDO endorse and strive for [reject or deny] equality in social structures. Accordingly, the egalitarian value of counterfeits should be more appealing to low (vs. high) SDO consumers, exerting greater effects on the purchase intentions of these consumers. Thus, we predict SDO moderates the relationship between egalitarian value and purchase of luxury counterfeits. Five studies test the effect of perceived inequality on the egalitarian value of counterfeit luxury goods (all studies), its effect on downstream purchase decisions (Studies 1B-4), and its conceptual moderator (Study 4). We address alternative explanations regarding price (Study 2) and status-signaling motives (Study 3), while demonstrating our effects using various luxury brands and products. We focus on egalitarian value, but report the results of the other values in Tables . Stimuli and pre-registrations are reported in . Confirmatory factor analyses and correlation analyses demonstrate the construct validity of egalitarian value (). Participants' income/SES does not moderate perceived inequality's effect on egalitarian value, nor its indirect effect on purchasing counterfeit luxury goods (). All data selection criteria are pre-registered, and sensitivity analyses suggest that the sample sizes across studies would detect medium-small effect sizes given adequate power (0.80). Analyses using full samples are reported in . << TEXT SHRUNK NONE OMMITTED>> Data are available at: . TABLE 1. Studies 1A–1B, Regressions on egalitarian value, using perceived inequality as the key predictor, controlling for other values. Studies 1A-1B measure perceived inequality and establish its relationship with the egalitarian value of counterfeit luxury goods, examining both counterfeit watches in a country with low income inequality (Sweden: Study 1A) and counterfeit scarfs in the U.S. (Study 1B). Participants approached by researchers in the center of a large Swedish city (N = 220) first completed a 4-item perceived inequality scale (Schmalor & Heine, ; α = 0.77; e.g., “Almost all the money that is earned goes to only a few people”; 1 = Not True At All, 7 = Extremely True). They then received and examined a counterfeit Rolex “Submariner” watch designed to replicate the original watch on all dimensions. They learned about the features of the replica, its cost (€250), and the legitimate Rolex's retail price (€12,000). Afterward, participants completed measures of the relative egalitarian value of a counterfeit Rolex compared to a legitimate Rolex (e.g., “Helps make life more fair”; 1 = Completely Disagree, 7 = Completely Agree), and its relative hedonic, utilitarian, economic, and status values. All scale measures are reliable across studies (all α > 0.70, see ). As pre-registered, seven men who did not complete the survey and four women were excluded, leaving N = 209 for analyses (Mage = 28.29, SD = 8.30). We regressed egalitarian value on perceived inequality, with other values as covariates. Perceived inequality positively related to the egalitarian value of the replica Rolex (b = 0.17, SE = 0.06, t(203) = 3.04, p = 0.003, r2 = 0.30: Table , Figure ), supporting our predictions using an actual counterfeit watch. Study 1A, Effect of perceived inequality on egalitarian value, controlling for other values as covariates. Study 1B Study 1B builds on Study 1A in several ways: First, measuring inequality prior to rating the counterfeit (Study 1A) may have inadvertently created a demand effect. To address this issue, here, we randomized the order of the inequality measure: the Inequality First [Last] condition reported perceived inequality before [after] rating the values of a counterfeit Louis Vuitton (LV) scarf. Second, Study 1A measured values of a counterfeit luxury good relative to its legitimate counterpart. Here, we measured the values of a counterfeit in isolation. Third, we measured purchase intentions (1 = Not at All; 7 = Very Much) to understand how egalitarian value influences consumption decisions. American participants (N = 411, CloudResearch Connect) completed this study. One participant failed the attention check, leaving N = 410 for analyses (45.1% females, Mage = 39.56, SDage = 12.61). We regressed the egalitarian value of the counterfeit LV on perceived inequality (standardized), measurement order (1 = inequality first, −1 = inequality last), and their interaction, with hedonic, utilitarian, economic, and status values as covariates. We found a main effect of perceived inequality (b = 0.21, SE = 0.05, t(402) = 3.93, p < 0.001), but no effect of measurement order (b = 0.02, SE = 0.05, t(402) = 0.46, p = 0.64) or an interaction (b = −0.04, SE = 0.05, t(402) = −0.78, p = 0.44; Table , Figure ). A second regression of purchase intentions on perceived inequality, order of measure, and their interaction yielded a main effect of perceived inequality (b = 0.18, SE = 0.08, t(406) = 2.09, p = 0.04) and no other effect [measurement order: b = −0.02, SE = 0.08, t(406) = −0.19, p = 0.85; interaction: b = −0.02, SE = 0.08, t(406) = −0.24, p = 0.81, Figure ]. Thus, perceived inequality predicted the egalitarian value of and purchase intentions for a counterfeit luxury good, regardless of when inequality was measured. Study 1B, Perceived inequality by measurement order interaction on egalitarian value, controlling for other values as covariates. Study 1B, Perceived inequality by measurement order interaction on purchase intentions. Egalitarian value mediated the relationship between perceived inequality and intentions to buy the counterfeit LV scarf, both when controlling for the other values (Hayes, : PROCESS Model 4, Bootstrapped sample = 5000, 95% CI = [0.039, 0.156]), and when entering all values as parallel mediators (95% CI = [0.037, 0.186]; Table ), outlining the unique effect of egalitarian value on the purchase intentions for counterfeit luxury goods. STUDY 2: COUNTERFEIT LUXURY VERSUS NON-LUXURY We posit that counterfeit luxury goods have egalitarian value under income inequality because they undermine the exclusivity of luxury markets. However, it may simply be that all low-priced goods provide egalitarian value through their general availability compared to higher-priced goods. Study 2 tests this alternative explanation by experimentally comparing counterfeit luxury goods to non-luxury but similarly priced products. Method Participants (N = 412 Americans, CloudResearch Connect) completed a two-condition (product type: counterfeit-luxury, non-luxury) between-subjects study. We recruited female participants as our stimuli are handbags (Wang et al., ). Participants first completed a perceived inequality scale (as in Studies 1A–1B), then shopped for a handbag online using one of two real-world e-commerce websites embedded in the study, allowing them to browse and interact with products. The Counterfeit-Luxury [Non-Luxury] condition browsed a webpage selling a replica Gucci [a Guess] handbag. We described Gucci [Guess] as a “luxury and prestigious designer brand” [“popular fashion brand”]. Gucci was indeed pretested to be more luxurious and exclusive than Guess (). To keep price perceptions constant, both products were similarly priced and were “cheaper” than alternative options (the replica Gucci was cheaper than a legitimate Gucci, and the Guess was temporarily on sale; ). As in Study 1B, participants reported the egalitarian, hedonic, utilitarian, economic and status values, and their purchase intentions for the respective handbag. Eight participants failed the attention check, leaving N = 404 for analysis (Mage = 41.26, SDage = 12.87). Results and discussion We regressed egalitarian value on product type (1 = counterfeit-luxury, −1 = non-luxury), perceived inequality (standardized), and their interaction, with other values as covariates. We found an interaction (b = 0.15, SE = 0.05, t(396) = 2.91, p = 0.004), a product-type main effect (b = 0.26, SE = 0.05, t(396) = 4.79, p < 0.001), but no perceived-inequality main effect (b = 0.08, SE = 0.05, t(396) = 1.48, p = 0.14; Figure ). Slope effect analyses showed that perceived inequality increased the egalitarian value of a counterfeit-luxury handbag (b = 0.23, SE = 0.08, t(396) = 3.07, p = 0.002), but not that of a non-luxury handbag (b = −0.08, SE = 0.07, t(396) = −1.01, p = 0.31). Study 2, Product type by perceived inequality interaction on egalitarian value, controlling for other values as covariates. A moderated mediation analysis using egalitarian value as the mediator, keeping other values as covariates, yielded a significant result (PROCESS Model 7, bootstrapped sample = 5000, 95% CI = [0.036, 0.245]). Egalitarian value mediated the positive effect of perceived inequality on purchase intentions for a counterfeit-luxury handbag (95% CI = [0.037, 0.174]), but not for a non-luxury handbag (95% CI = [−0.111, 0.040]; Table ). This moderated mediation was replicated when entering all values as parallel mediators (95% CI = [0.002, 0.256]; Table ). We predicted perceived inequality to increase purchase of the counterfeit-luxury but made no prediction on how it would affect purchase of the non-luxury. A regression on purchase intentions yielded main effects of product-type (b = −0.20, SE = 0.08, t(400) = −2.33, p = 0.02) and perceived inequality (b = 0.22, SE = 0.08, t(400) = 2.65, p = 0.01), but no interaction (b = 0.04, SE = 0.08, t(400) = 0.53, p = 0.6), suggesting perceived inequality also increased purchase of the non-luxury. However, this effect was not mediated by egalitarian value. Study 2 clarifies the process through which egalitarian value emerges. Perceived inequality increased the egalitarian value of counterfeit-luxury bags, but not that of similarly priced non-luxury bags. These results suggest that egalitarian value emerges not from a product's low price, but from its ability to provide access to an otherwise restricted luxury market. To increase the ecological validity of our investigation, we chose to use the websites of the actual vendors selling these products. However, this decision also meant that there were potentially influential differences in product design and user interface between the two conditions as well. In the study that follows, we use the same product framed differently to ensure that the natural confounds in the design of Study 2 do not drive our effects. STUDY 3: MANIPULATING INEQUALITY AND PRODUCT VISIBILITY Study 3 builds on previous studies in two ways. First, we manipulate perceived inequality to establish causality. Second, we address an alternative explanation that counterfeits provide egalitarian value through status seeking that ameliorates income anxiety (Kurt & Gino, ; Velandia-Morales et al., ; Walasek & Brown, ). As consumers have a greater desire for status goods in public versus private (Dubois et al., ; Griskevicius et al., ), we manipulate the social visibility of counterfeit-luxury goods through its public versus private use. This manipulation tests whether our effect is tied to internal ideologies versus a desire for social status. Methods Participants (N = 628 female Americans, Prime Panel) completed a 2 (inequality cue: inequality, control) by 2 (visibility: public, private) between-subjects study. We recruited female participants based on a pre-tested female preference for Burberry scarves and throw blankets. We manipulated perceived inequality following prior research (Liu et al., ): In the Inequality [Control] condition participants watched a video about research on income inequality in the U.S. [on brain science]. To manipulate visibility, we varied how a good was described. In the Private condition, participants imagined shopping for a throw-blanket to use at home, where public attention is low. In the Public condition, participants imagined shopping for a scarf to use during social outings, where public attention is heightened. Participants in both conditions viewed the same image of a counterfeit and a legitimate Burberry throw-blanket/scarf displayed side by side. Participants rated the counterfeit and legitimate Burberry on their relative egalitarian, hedonic, utilitarian, economic, and status values, (1 = More representative of the original, 7 = More representative of the replica) and reported their purchase preference (1 = Definitely the original Burberry, 7 = Definitely the replica Burberry). Finally, they completed comprehension and manipulation checks for the visibility manipulation, and demographic information, including subjective SES (Adler et al., ; ). As pre-registered, we excluded those who failed the inequality cue comprehension check (n = 32) or visibility comprehension check (n = 91), leaving N = 505 responses (Mage = 43.89, SDage = 16.88) for analyses. Results and discussion Both manipulations were successful. Perceived inequality was reported higher in the inequality (vs. control) condition (Minequality = 6.00, SDinequality = 1.35, Mcontrol = 5.11, SDcontrol = 1.48, F(1, 501) = 49.05, p < 0.001, ηp2 = 0.09), and not affected by the visibility manipulation (main effect p = 0.95, interaction p = 0.7). The product was perceived to be used in more public settings in the public (vs. private) condition (Mpublic = 6.19, SDpublic = 1.44, Mprivate = 2.43, SDprivate = 1.76, F(1, 501) = 698.07, p < 0.001, ηp2 = 0.58), and not affected by the inequality cue manipulation (main effect p = 0.8, interaction p = 0.6). An ANOVA on egalitarian value using inequality cue and social visibility as factors yielded a main effect of inequality cue (Minequality = 5.13, SDinequality = 1.23, Mcontrol = 4.88, SDcontrol = 1.17, F(1, 501) = 5.27, p = 0.02), but no main effect of visibility (F(1, 501) = 0.01, p = 0.92), or interaction (F(1, 501) = 0.06, p = 0.81). These results hold when controlling for the other values (Table ). An ANOVA on purchase preference using the same factors revealed a marginal effect of inequality cue (Minequality = 5.76, SDinequality = 1.83, Mcontrol = 5.47, SDcontrol = 1.97, F(1, 501) = 2.90, p = 0.09), but no main effect of visibility (F(1, 501) = 0.20, p = 0.66) or interaction (F(1, 501) = 0.38, p = 0.54). Mediation analyses found that egalitarian value mediated the effect of perceived inequality on purchase preferences (PROCESS Model 4, Bootstrapped Sample = 5000), both when controlling the other values as covariates (95% CI = [0.006, 0.087]), and including all values as parallel mediators (95% CI = [0.007, 0.104]; Table ). By manipulating perceived inequality, Study 3 offers causal evidence linking perceived inequality to the egalitarian value of and purchase preference for counterfeit luxury goods. These effects hold whether the counterfeit luxury good is used in public or private, suggesting that the egalitarian value operates through the psychological value of counterfeit luxury goods undermining exclusionary markets, rather than through consumers' motivation to signal social status. Moreover, a supplementary analysis of the interaction between perceived inequality and SES in predicting egalitarian value was insignificant, p = 0.58 () where the effect holds across levels of SES, discounting the role that SES might play in these effects. STUDY 4: SOCIAL DOMINANCE ORIENTATION Study 4 examines the moderating effect of consumers' social dominance orientation (SDO). As noted in the introduction, we predict consumers' beliefs regarding the desirability and feasibility of equality in society ultimately influence their decision to buy counterfeit goods to make the world feel more equal. Methods Participants (N = 1029 Americans, Prime Panel) completed a 2 (inequality cue: inequality, control) by SDO (measured) between-subjects study. They completed the same perceived inequality manipulation, comprehension check, and manipulation check as in Study 3. Next, participants viewed photos of a legitimate iPhone and a GooPhone – a counterfeit phone that copies the design and look of an iPhone at a reduced cost. They reported the egalitarian, hedonic, utilitarian, economic, and status values of the GooPhone relative to the iPhone and their preference for purchasing a GooPhone over an iPhone. Participants also completed demographic information, an attention check, and a measure of SDO (Sidanius et al., ; α = 0.89). We excluded respondents who failed the attention check (n = 31) or comprehension check (n = 21), leaving N = 975 respondents (58.2% females, Mage = 61.42, SDage = 15.85) for analyses. << TEXT SHRUNK NONE OMMITTED>> Results The manipulation of inequality was successful. Perceived income inequality was reported higher in the inequality (vs. control) condition (Minequality = 6.21, SDinequality = 1.28, Mcontrol = 5.04, SDcontrol = 1.53, F(1, 974) = 167.62, p < 0.001, ηp2 = 0.15). The manipulation had no effect on SDO (p = 0.97), allowing us to test SDO as a moderator. We conducted a moderated mediation analysis model (PROCESS Model 15), using inequality cues as the independent variable (1 = Inequality, −1 = Control), purchase preference as the dependent variable, egalitarian value as the mediator, and SDO as the moderator (i.e., moderating both b-path, the link between egalitarian value and purchase preference, and c-path, the link between perceived inequality and purchase preference). We entered the other values as parallel mediators. Regression analyses in the model revealed predicted results: First, perceived inequality increased egalitarian value (b = 0.29, SE = 0.04, t(973) = 6.62, p < 0.001). Second, the egalitarian value interacted with SDO to affect purchase preferences (b = −0.11, SE = 0.04, t(973) = −2.48, p = 0.01; Figure ). As predicted, the effect of egalitarian value on purchase preference was stronger among those with low (−1SD) SDO (b = 0.49, SE = 0.06, t(961) = 7.63, p < 0.001), compared to those with high (+1SD) SDO (b = 0.27, SE = 0.07, t(961) = 3.85, p < 0.001). Note: Perceived inequality increased purchase preference for counterfeits for both high and low SDO consumers, but the positive effect is stronger among those with higher SDO. An alternative moderated mediation analysis using income as moderator did not produce significant results (95% CI = [−0.045, 0.015]; ). Thus, the effect of egalitarian value on purchase holds across individuals' economic status. Income and SDO did not correlate (r = 0.04, p = 0.24), validating their conceptual and empirical distinctions. Discussion Study 4 identifies a moderating effect of SDO: the egalitarian value of the counterfeit had stronger effects in driving purchases among consumers with lower SDO (i.e., desire equality in hierarchies). This suggests that the psychological driver of our effects reflects ideologies related to social equality. Moreover, finding that SDO, but not income, moderated our effects further supports that egalitarian value reflects a counterfeit's perceived ability to adjust the structure of social hierarchies, rather than its ability to inflate users' status. GENERAL DISCUSSION This research presents a novel link between income inequality and counterfeit luxury goods, driven by the egalitarian value of counterfeits. We rule out alternative accounts, such as price (Study 2) and status motives (Study 3) and demonstrate that egalitarian value arises regardless of consumers' income/SES (DMA-IV). These findings contribute to several streams of literature, offering theoretical and empirical directions for future inquiry. Contributions First, we contribute to research on counterfeit luxury goods by demonstrating that, beyond traditional values of luxury and counterfeit goods (i.e., hedonic, utilitarian, economic, and status values), counterfeit luxury goods carry a distinct egalitarian value that functions to address inequality. Although earlier work pointed to the social-adjustive function of counterfeit luxury goods in facilitating status gain (Wilcox et al., ), we contribute to this literature by showing how counterfeit luxury goods may undermine (vs. affirm) existing social structures (Schmitt et al., ), leveling the playing field for consumers. Second, we contribute to the income inequality literature by identifying a novel consumption consequence. Whereas perceived inequality has been shown to increase genuine luxury consumption through various status motivations (Jaikumar & Sarin, ; Kurt & Gino, ; Ordabayeva & Chandon, ; Sharma & Alter, ; Velandia-Morales et al., ), we show that it also increases consumption of counterfeit luxury goods. Importantly, this effect is not driven by status seeking motives, but by motives to restore social equality. These findings contribute to the understanding of how consumers react to income inequality by using consumption to ostensibly shape social conditions. Relatedly, our findings suggest that “illegitimate” goods, such as counterfeits, may serve social, political, or moral purposes (Koos, ; Rössel & Schenk, ). Both theoretical (Schmitt et al., ) and empirical (Kozinets & Handelman, ) work have examined the macro and sociological conditions that contribute to consumer efforts to undermine existing institutions. However, scholarship has only begun to understand how micro-level consumption accomplishes these goals. Contributing to this literature, our findings suggest that counterfeits may serve as a means of rejecting and resisting the existing exclusionary institutions (Bourdieu, ). Implications and future directions The present findings suggest that perceived inequality increases counterfeit purchases through the egalitarian value of counterfeits, independently of other values. Of course, egalitarian motives are not the sole reason that consumers purchase counterfeits. Research shows that consumers also purchase counterfeits for status reasons (Wilcox et al., ) and that income inequality increases status seeking (Walasek & Brown, ). Thus, there are likely situations where consumers—possibly those prone to social comparisons (Gibbons & Buunk, ) or those with social-adjustive motives (Wilcox et al., )—may purchase counterfeits for their status value, such that multiple values may influence consumption. In addition, consumers may purchase counterfeits to fit in with a desired social group—to indicate “belonging” to certain wealth or status-oriented groups. Future research is needed to understand the contextual and personal factors that explain when and why consumers are more likely to use counterfeits for status versus egalitarian motives. Furthermore, we focus on perceived income inequality and complement our findings with secondary data from Google Search Trends and objectively measured inequality (). Future research should investigate the evolution of inequality and the rise of counterfeits. It is possible that the existence of counterfeit luxury goods motivates luxury brands to protectively restrict access to products, ironically increasing market inequalities in ways that perpetuate the presence of counterfeits. For example, Rolex is known for creating “wait lists” that make buyers demonstrate loyalty before being able to purchase new or popular watches: an enforced exclusivity that might explain the abundance of counterfeits. Finally, future research should investigate the psychological process through which consumers construct the egalitarian value of counterfeit luxury goods. Indeed, rather than genuinely using counterfeits to address inequality, consumers might “construct” egalitarian value as an unconscious way to justify their counterfeit purchase (Bian et al., ). Understanding the origin, support for, and delimitations of these beliefs will help businesses and governments address the rise of counterfeit goods

This study shows that counterfeit and pirated products are being produced and consumed in virtually all economies, with Asia emerging as the single largest-producing region. In recent years, there has been an alarming expansion of the types of products being infringed, from luxury items (such as deluxe watches and designer clothing), to items that have an impact on personal health and safety (such as pharmaceutical products, food and drink, medical equipment, personal care items, toys, tobacco and automotive parts). With respect to magnitude, the study notes that promising work has been done in a number of sectors to measure the extent of counterfeiting and piracy, but that much more can and should be done. The situation of each industry is unique, therefore techniques for carrying out such analysis need to be tailored to the sectors concerned.

To date, no rigorous quantitative analysis has been carried out to measure the overall magnitude of counterfeiting and piracy. This report notes the difficulties that would need to be addressed before such an estimate could be made, and then presents a methodology for estimating the role of counterfeiting and piracy in international trade, which is only a part, albeit an important one, of the total picture. An analysis of international trade data (landed customs value basis1 ) was carried out using the methodology; it suggests that up to USD 200 billion of internationally traded products could have been counterfeit or pirated in 2005. This amount is larger than the national GDPs of about 150 economies2 . The figure does not, however, include counterfeit and pirated products that are produced and consumed domestically, nor does it include non-tangible pirated digital products being distributed via the Internet. If these items were added, the total magnitude of counterfeiting and piracy worldwide could well be several hundred billion dollars more.

Another feature of institutional dysfunction is weak governance and accountability, which also have the potential to erode trust in formal institutions and governments (North, 1990). Studies indicate that dysfunctional institutions, such as weak governance structures, limited regulatory enforcement and oversight, and inadequate regulations, have often been major contributory factors in pushing some businesses to engage in illegitimate activities (Amankwah-Amoah et al., 2018). Another dysfunctional institution with the potential to precipitate the growth of counterfeit products is weak intellectual property protection in many developing economies (Cavusgil et al., 2020). Indeed, weak intellectual property rights enforcement can lead to the theft of ideas and the breaching of copyrights (Ang et al., 2014; Cavusgil et al., 2020; Mandrinos et al., 2022). These deficiencies can pose significant challenges for firms operating in emerging economies or transitional societies where legal systems, property rights, and regulatory frameworks may be incomplete or weak (Ang et al., 2014). History has shown that trade in counterfeit goods and trademark infringements is not new to developing or developed nations (OECD, 2017; Yi et al., 2022). In recent decades, the proliferation of counterfeit products has been further exacerbated by rapid technological advancements, including the internet and social media platforms (Gao and Wu, 2023; Sun et al., 2020). Counterfeit and substandard products continue to bedevil developing countries, unleashing a diverse range of challenges for countries (Amankwah-Amoah, 2022; Amankwah-Amoah and Hinson, 2022; Bian et al., 2023; Bolla et al., 2020; Karungamye, 2022). Accordingly, this study seeks to illuminate how institutional dysfunctions in developing countries can create conditions leading to the evolution and detrimental public health effects of counterfeiting.

How can we measure geopolitical risks and what does this tell us?

Measuring geopolitical risks is an important but arduous task. One method is the geopolitical risk index (GPR), which is constructed using the frequency of articles in leading newspapers that discuss adverse geopolitical events such as wars, terrorism and tensions among political organisations (Caldara and Iacoviello, 2022).

Additionally, there’s evidence to suggest recessions are becoming less protracted over time. Since 1854, the United States has weathered 34 recessionary cycles, with an average duration of 17.5 months. Post-1945, however, that average has decreased to just 11 months. This trend is a testament to the adaptive capacity of the economy, learning from each downturn to forge a more robust foundation for future prosperity.

In conclusion, while recessions are undoubtedly challenging, they also offer opportunities for recalibration and growth, both for individuals and the economy as a whole. As history shows, the economic pain is often followed by remarkable recovery, suggesting that even in the darkest financial times, there is light at the end of the tunnel.

Yet I cannot think of any country in similar circumstances today. Now is hardly the time for Russia to try to grab more of Ukraine—if it even wanted to—or for China to make a play for Taiwan, because the costs of doing so would clearly outweigh the economic benefits. Even conquering an oil-rich country—the sort of greedy acquisitiveness that Trump occasionally hints at—doesn’t look attractive when there’s a vast glut on the market. I might be worried if some weak and defenseless country somehow came to possess the entire global stock of a successful coronavirus vaccine, but that scenario is not even remotely possible. If one takes a longer-term perspective, however, a sustained economic depression could make war more likely by strengthening fascist or xenophobic political movements, fueling protectionism and hypernationalism, and making it more difficult for countries to reach mutually acceptable bargains with each other. The history of the 1930s shows where such trends can lead, although the economic effects of the Depression are hardly the only reason world politics took such a deadly turn in the 1930s. Nationalism, xenophobia, and authoritarian rule were making a comeback well before COVID-19 struck, but the economic misery now occurring in every corner of the world could intensify these trends and leave us in a more war-prone condition when fear of the virus has diminished. On balance, however, I do not think that even the extraordinary economic conditions we are witnessing today are going to have much impact on the likelihood of war. Why? First of all, if depressions were a powerful cause of war, there would be a lot more of the latter. To take one example, the United States has suffered 40 or more recessions since the country was founded, yet it has fought perhaps 20 interstate wars, most of them unrelated to the state of the economy. To paraphrase the economist Paul Samuelson’s famous quip about the stock market, if recessions were a powerful cause of war, they would have predicted “nine out of the last five (or fewer).” Second, states do not start wars unless they believe they will win a quick and relatively cheap victory. As John Mearsheimer showed in his classic book Conventional Deterrence, national leaders avoid war when they are convinced it will be long, bloody, costly, and uncertain. To choose war, political leaders have to convince themselves they can either win a quick, cheap, and decisive victory or achieve some limited objective at low cost. Europe went to war in 1914 with each side believing it would win a rapid and easy victory, and Nazi Germany developed the strategy of blitzkrieg in order to subdue its foes as quickly and cheaply as possible. Iraq attacked Iran in 1980 because Saddam believed the Islamic Republic was in disarray and would be easy to defeat, and George W. Bush invaded Iraq in 2003 convinced the war would be short, successful, and pay for itself. The fact that each of these leaders miscalculated badly does not alter the main point: No matter what a country’s economic condition might be, its leaders will not go to war unless they think they can do so quickly, cheaply, and with a reasonable probability of success. Third, and most important, the primary motivation for most wars is the desire for security, not economic gain. For this reason, the odds of war increase when states believe the long-term balance of power may be shifting against them, when they are convinced that adversaries are unalterably hostile and cannot be accommodated, and when they are confident they can reverse the unfavorable trends and establish a secure position if they act now. The historian A.J.P. Taylor once observed that “every war between Great Powers [between 1848 and 1918] … started as a preventive war, not as a war of conquest,” and that remains true of most wars fought since then. The bottom line: Economic conditions (i.e., a depression) may affect the broader political environment in which decisions for war or peace are made, but they are only one factor among many and rarely the most significant. Even if the COVID-19 pandemic has large, lasting, and negative effects on the world economy—as seems quite likely—it is not likely to affect the probability of war very much, especially in the short term.

Diversionary wars can happen, but they are not terribly common. It would be extremely unlikely for any government to initiate a major conflict because it wants to distract its people from domestic problems. For one thing, a major conflict would almost certainly exacerbate their country’s economic and social problems by putting the country under intense strain. Unless the war is a minor campaign against a much weaker state, there is no reason to assume that the war will be either quick or successful. In most cases, it is unlikely that starting a war would benefit the leadership or the regime. Even a successful minor war might not be very useful for the leadership because the stakes are so insignificant.

If the war goes badly, it could lead to much deeper discontent and opposition to the regime. As Fravel says, diversionary wars are “dangerous gambits because if leaders initiate a diversionary crisis or war that fails to produce the desired results, they risk expediting the collapse of their government.” Many governments gamble by starting a war when they feel confident and secure in their position. That gamble may be the result of poor judgment and based on bad information, but it is one that leaders tend to make when they assume they are acting from a position of strength.

The diversionary theory of war is one of the best-known conflict initiation theories focusing on democratic leaders’ incentives. According to the theory, democratic leaders who face greater electoral challenges, either due to political scandals or an economic downturn, are more likely to choose provocative foreign policies and seek to lead the country into diplomatic crises, in hopes of inciting nationalistic sentiments that will boost their approval ratings via the so-called “rally around the flag” effect (e.g. Gaines 2002;Hetherington and Nelson 2003; Mueller 1973). Despite the intuitive appeal of this theory, empirical studies have been largely unable to find consistent evidence to corroborate the purported theoretical mechanisms. Findings from observational studies have been quite mixed. The fact that a diverse set of findings have been reported from observational studies suggests that unobservable confounders arising from INTERNATIONAL INTERACTIONS 1057 strategic interactions greatly hinder our ability to tease out the causal effect of electoral hardship on conflict behaviors. In this research note, we claim that the key assumption of the theory does not work as expected. That is, a political leader cannot divert attention from [their]his/her political scandals by emphasizing a foreign threat and alerting the general public that the country may go to war against an enemy. Although the assumptions that the threat or use of force is salient and that an acute enemy threat would create a rally-around-the-flag effect are common, they have rarely been tested at a micro-level in an experimental setting. Our team conducted a cross-national experiment to find out whether and how political leaders could divert the public’s attention away from their political scandals. We selected Japan and Israel as fields of the experiment. Both are com-parable parliamentary democracies that have witnessed a series of serious political scandals. Moreover, the general Japanese and Israeli public could plausibly expect a hawkish national security policy against the potentially nuclear-armed enemy states of North Korea and Iran, respectively, both of which are widely represented as “evil” and “mad” enemies.1 While we acknowledge that Japan and Israel have significantly different military cultures and distinct records of militarized interstate disputes, we consider them to be interesting, important, and comparable cases that could generate significant findings in testing the above-mentioned assumptions of diversionary war theory. Our contribution is twofold. First, we confirm that, in both Japan and Israel, diverting public attention from salient political scandals would fail even if a political leader emphasizes the enemy threat or alerts the public to potential escalatory moves against the enemy. In particular, the most escalatory hawkish policy—a preemptive move—would not help the government hide its political scandals from the general public.

Table 8 shows that the mean and median values of the adjustedR2of the risk-free rate RF are 0.52% and0.17%, respectively. These values are close to those of the BW index. As for the lagged explanatory power, the adjustedR2of RF goes up steadily from 1 lag to 3lags. However, the lagged explanatory power of RF is significantly lower than that of the BW index. This result shows that the BW index is an improved sentiment indicator of the stock returns. On the other hand, the UMI exhibits no explanatory power to either the contemporaneous or lagged stock returns. The adjustedR2of the UMI is all negative. I also tested the explanatory power of the OECD consumer confidence index and the OECD business confidence index. Neither of them has a positive adjusted R2 on the contemporary or lagged stock returns. From Table 8, I can infer that the explanatory power of the indirect sentiment measures on stock returns is relatively stable. The difference across different measures mainly lies in the level of the explanatory power. On the other hand, the direct sentiment measures exhibit a different pattern. Compared with the AAII indexes, the other direct sentiment measures do not display any explanatory power. This indicates that the survey sample and the survey questions are essential to successfully reflect the financial market sentiment. Currently, The AAII indexes and the BW index are the best direct and indirect sentiment measures in explaining stock returns. Further research is needed to shed more light on this topic.

The good news is that business confidence is hopeless as an economic indicator. The correlation with economic growth is poor and I largely ignore business confidence readings. Changes in direction can provide some insightful information – whether things are picking up or slowing down, but not the levels. Businesses tend to be more upbeat regarding general confidence about the economy under a blue flag as opposed to a red one. Business confidence averaged minus 18 between 2000 and 2007. The economy (measured by real gross domestic product) grew on average by more than 3.5% per year. Yep, confidence was negative, but growth was positive. So, we ignore business confidence as an economic indicator. This is nothing new. It’s surprising headline business confidence figures receive so much attention.

Alibaba spearheads a new model for intellectual property protection The protection of intellectual property (IP) rights in today’s innovation-driven and increasingly knowledge-based global economy is an important consideration for policymakers and businesses around the world. IP protection has also become a central concern for online retailers, including the Alibaba Group which has had IP protection in its sights since it began operating. In an attempt to tackle the proliferation of counterfeit products more effectively, and the growing number of related complaints, many on-line retailers have set about building user-friendly, internal governance systems that support the protection of IP and their reputation as socially responsible corporate citizens. The Alibaba Group, for example, has, through experimentation, pioneered the development of an ever-more sophisticated and effective IP protection system. Using advanced computing technologies and big data, Alibaba’s Platform Governance Department has crafted and rolled out an effective system for spotting and disciplining offers involving counterfeit goods on its platforms. Alibaba’s governance model is built around proactive monitoring and an effective IP rights infringement notification system. The so-called Alibaba Model for IPR protection in e-commerce is governed by technology, innovative business practice and the law. Using technology to improve online governance Alibaba is harnessing various advanced technologies to tackle online counterfeiting and piracy. To identify counterfeit goods it uses fake product identification modelling, image recognition techniques, semantic recognition algorithms, product information databases, real-time interception systems and data collaboration platforms. Thanks to its algorithms, every day Alibaba identifies up to 600 million product images with an accuracy rate of 97.6 percent. Using these sophisticated technologies, over 97 percent of suspected infringing goods are removed from Alibaba platforms as soon as they are posted online. In 2017, twenty-seven times more goods were removed from Alibaba platforms using these technologies than were removed with takedown notices issued by IP rights holders.

The INFORM Act requires marketplaces to verify only those sellers who qualify as "high volume" sellers, those who enter into at least 200 sales transactions in a 12-month period with a minimum total of $5,000.157 To ensure that consumers do not fall victim to sellers with new accounts or who have yet to meet the [*234] minimum sale requirements, marketplaces should require all third-party sellers (not just "high volume" sellers) to provide some proof of identification when the seller creates their marketplace account. To ensure legitimacy, marketplaces should require sellers to provide a business tax ID or business license number as part of the seller registration process.158 Requiring a business license or business tax ID would add an extra step easily met by current, legitimate business owners, and registering a new business is relatively simple and inexpensive.159 Opponents of this requirement argue that the beauty of the online marketplace is that it allows any enterprising individual to participate and sell their wares, and by requiring a business license, the government is limiting who can sell.160 This argument ignores the fact that both brick-and-mortar retailers, as well as online store retailers, must possess a valid business license. Why should a seller on a virtual marketplace be held to a different standard? Admittedly, there is still a risk of sellers creating a false business and disguising themselves as a new, valid business entity to "circumvent [the] vetting process."161 Assuring that seller accounts are accurate and trustworthy requires ongoing verification and auditing of seller accounts to ensure compliance.162 This is a best practice that many marketplaces currently implement and the INFORM Act now requires.163 Requiring a business license or business tax ID for all sellers would ensure an extra layer of identity verification during the licensing process and add an extra deterrent to those who are looking for an easy way to access the market to sell fake goods.

Nowadays, an increasing number of counterfeit leather products are arising in the market. To obtain high profits, some illegal traders counterfeit all kinds of bestselling leather products, which infringes the intellectual property rights of the business, causes huge economic loss, and negatively influence the business enthusiasm for innovation [1–3]. So far, anti-counterfeiting technology has been an effective method to curb the spread of counterfeit products. However, the traditional anticounterfeiting technologies ranging from watermarks [4], holography [5–7], and two-dimensional barcodes [8], are difficult to reach the effective anti-counterfeiting purpose due to the simple preparation process and visible patterns. Invisible anti-counterfeiting materials have attracted the attention of researchers by their high concealment properties [9–11]. The most frequently used invisible anti-counterfeiting technology in leather products is to draw invisible anti-counterfeiting labels (ACLs) with organic fluorescent dyes [12]. Generally, such labels suffer from short service life due to the photobleaching of organic dyes under irradiation [13, 14]. One way to address this issue is to use fluorescent inorganic nanomaterials to prepare these invisible ACLs [15–17], e.g., quantum dots. However, they are toxic[13] and often require ultraviolet (UV) photons to achieve the anti-counterfeiting function. It is well known that UV light may cause the degradation of organic materials in the ACLs and shorten their service life [18–20]. Therefore, searching for a non-toxic inorganic material having good luminescent stability to prepare ACLs remains a grand challenge

Increase in IP theft IP theft has increased in recent years. Investigations of foreign infringement of domestic intellectual property rights have risen in eight of the last ten years, from 17 cases in 2002 to 69 cases in 2011.4 Moreover, there has been a dramatic rise in the number of cases in recent years, with the number of cases investigated by the United States International Trade Commission (U.S. ITC) rising by 80.6 percent and 23.2 percent in 2010 and 2011, respectively (see Figure 1). U.S. Customs and Border Protection reports that consumer electronics (22.0 percent), footwear (14.0 percent) pharmaceuticals (9.0 percent) and optical media (9.0 percent) made up more than half of the total domestic value of counterfeit goods entering the United States in 2011.5 Goods from China accounted for more than three-fourths of the value of counterfeit products seized in the United States from 2004-2009.6 But the problem is not limited to the United States. Counterfeiting and piracy have become increasingly pervasive in international trade. Estimates show that trade in counterfeit and pirated products as a share of all globally-traded commodities increased by 7.6 percent between 2000 and 2007.7 These figures underestimate the full extent of the problem since electronic piracy is excluded. Infringement of intellectual property rights Businesses often experience lost revenue and ultimately lower profits when sales are diverted from authentic goods to counterfeit ones. In addition to lower sales, profits are also adversely affected by the additional costs required to protect the firm from future episodes of intellectual property infringement.8 One estimate found that the average company lost $101.9 million in revenues and incurred costs of $1.4 million in identification and enforcement of intellectual property rights, leading to an average decline in profits of $46.3 million.9 Recent government data help to shed light on the magnitude of foreign infringement. In 2011, the U.S. Customs and Border Protection seized 24,792 counterfeit or pirated goods, a 24.2 percent increase over the amount of goods seized in 2010.10 These seized goods represented more than $1.1 billion in lost sales.11 Prepared by the Chairman’s Staff of the Joint Economic Committee 3 Availability of a counterfeit good can also put downward pressure on the price of the authentic product, causing a further decline in a firm’s revenue. Additionally, a company’s brand may be damaged when consumers who are unaware they have purchased a counterfeit good blame the maker of the genuine product for the poor-quality counterfeit they have bought. Few small businesses bring foreign infringement complaints Small businesses are unlikely to have the financial resources to protect themselves from IP theft or pursue enforcement actions when facing losses. Data on investigations initiated and completed by the U.S. ITC show that while small businesses represent 79.0 percent of all businesses in the U.S., they comprise only 10.5 percent of firms filing complaints regarding intellectual property infringement.12 The vast majority of firms, 78.9 percent, that request an investigation into the infringement of intellectual property are large and often public firms.13 This could be because small firms do not have the resources to pursue enforcement actions but could also reflect a bigger impact of infringement on larger firms. Resolution of foreign infringement cases is a lengthy process Resolution of foreign infringement complaints often take substantial time to resolve. Nearly one-third (30.1 percent) of cases submitted to the U.S. ITC took at least a year to complete (see Figure 2). And 7 out of 10 cases (69.9 percent) took 6 months or longer. The large costs associated with intellectual property infringement may mean that some firms are forced out of business before the infringement investigation is completed. Additionally, protecting intellectual property from the start can be timeconsuming. For example, even with recent improvements in the patent review procedure, new applications take approximately three years to fully process. Prepared by the Chairman’s Staff of the Joint Economic Committee 4 Conclusion Intellectual property is at the core of U.S. competitiveness, productivity gains and economic growth. While creating precise estimates of the magnitude of counterfeiting and piracy is difficult because of the complexities associated with measuring a secret, illegal activity, there is broad agreement that IP theft has increased in recent years. The consequences are many. Foreign infringement of intellectual property harms businesses by raising their costs, lowering revenue, and eroding profits. Consumers can face health or safety hazards from counterfeit pharmaceuticals and automotive products, and pirated software presents a range of threats to computer security and personal privacy. As a result of counterfeiting and piracy, governments have to make do with less tax revenue. Strengthening IP enforcement and providing more timely resolution of foreign infringement complaints can help combat IP theft. The Office of the U.S. Intellectual Property Enforcement Coordinator is developing a new Joint Strategic Plan on Intellectual Property Enforcement. This plan presents an opportunity to improve the protection of intellectual property in the United States, reduce the costs of IP infringement and provide individuals and firms with greater confidence that their ideas and innovations will be protected.

C. The Damage to Brands Caused by Counterfeiting As the internet aids and abets the sale of counterfeit goods of all types to American consumers, the actual and potential damage to brand owners and their reputations grows more severe. Fraudulent goods are now competing for sales directly with the genuine product, so brand owners are suffering quantifiable revenue losses. Small businesses in particular can suffer massive drops in sales and fall into a death spiral once counterfeits start appearing on sites like Amazon. 35 [*1206] When consumers receive fake products, and are inevitably disappointed in their performance, it erodes the reputation of the counterfeited brand. Since consumers may not recognize the counterfeit as a fake, when it fails to work properly, or falls apart quickly, or does not meet their expectations, they are likely to blame the authentic brand owner. 36 Dissatisfied consumers may spread their view by word of mouth and/or by leaving negative reviews online. 37 Companies that sell to businesses should also concern themselves with counterfeiting because counterfeits have infected the B2B 38 online marketplace. 39 The damage is even more severe when the counterfeit goods result in harm to health or welfare. The threats posed by counterfeits include defective airbags, fake airplane parts, copycat medications with no active ingredients, and contaminated baby formula. 40 Those industries where consumer trust is vital are particularly vulnerable to brand destruction from counterfeits. 41 With counterfeit goods so widespread, and the harm to brands so damaging, it is incumbent [*1207] on trademark owners to be more proactive than ever in policing their brands.

Shares of COVID-19 vaccine makers fell on Thursday as governments debated plans to waive patent protection for the shots, with analysts saying the move could rattle investor sentiment or weigh on longer-term business prospects. The declines came even as some analysts raised doubts about any near-term pressure on COVID-19 vaccine sales from discussions of waiving intellectual property rights, given the manufacturing complexity and scarcity of raw materials. Combined, Pfizer Inc (PFE.N), opens new tab and Moderna Inc (MRNA.O), opens new tab have forecast a total of over $45 billion in sales this year for their COVID-19 vaccines. Among companies with COVID-19 vaccines, shares of Pfizer fell 1.7% and were among the biggest weights on the benchmark S&P 500 index (.SPX), opens new tab, while U.S. shares of its German partner BioNTech SE shed 0.6% after falling as much as 15% earlier. Moderna was off 1.3%, recovering after being down nearly 12%, while Johnson & Johnson (JNJ.N), opens new tab and AstraZeneca Plc (AZN.L), opens new tab were little changed, as the broad S&P 500 rose 0.2%. "This measure is a potential risk to the long-term tail for the vaccine players – though we remind investors that the Street and share prices were already skeptical on the longer-term sustainability of these businesses," Barclays analysts said in a note. Shares were initially rattled late on Wednesday after U.S. President Joe Biden backed a proposed waiver for intellectual property rights. read more The Biden administration move was welcomed by patent activists and the World Health Organization as it could increase availability of vaccines to poorer nations including India, which has become the latest epicenter of the pandemic with its hospitals overwhelmed and shortages of oxygen and medicines. The stocks pared steeper earlier losses on Thursday after a German government spokeswoman said the U.S. proposal would have significant implications for production. Despite Biden's backing, it could take months for the World Trade Organization (WTO) to hammer out any deal. read more Shares of other U.S. companies developing COVID-19 vaccines were shaken. Novavax Inc (NVAX.O), opens new tab, whose vaccine has yet to be authorized by any country but is gearing up for deliveries later this year, fell nearly 10% initially but were up 1.6% in afternoon trade. Vaccine maker shares lost ground elsewhere, with Germany's Curevac NV (5CV.DE), opens new tab, which has sought approval for its COVID-19 vaccine, tumbling 18%. Shares of China's CanSino Biologics Inc (6185.HK), opens new tab, which makes a single-dose COVID-19 vaccine, were off 15%. The slide in stocks was understandable given patent headlines, but is likely an over-reaction, said Zhiqiang Shu, biotechnology analyst at Berenberg in New York. "The production of mRNA vaccines is not just about intellectual property," he said of the technology used to make the Moderna and Pfizer/BioNTech shots. "A lot of other things are in play, such as manufacturing know-how and capacity. Other companies or countries are unlikely to produce mRNA shots quickly." Jefferies analyst Michael Yee said while the proposal was not a good "headline" for biotech and could weigh on valuations, "the bottleneck is neither access nor patents (or price) but simply that there aren't enough vials, raw materials, etc to manufacture it regardless of patents." Moderna said on Thursday it believes countries around the globe would continue buying its COVID-19 vaccine for years even if its patents are waived, noting that rivals would face significant hurdles in scaling up manufacturing. read more Morgan Stanley analyst Matthew Harrison said he did not see significant practical implications for Moderna from this news. "We do not believe the WTO has any mechanism to force management to teach other manufacturers how to make their vaccine," he said, adding that it could take six to nine months to scale production.

The threat a TRIPS waiver poses for SAB Biotherapeutics’ IP portfolio is faced by many biotechs, Sullivan explained. Companies must alter decisions about how they will allocate future R&D capital and how they approach the investor community. The threat can discourage investment, “especially from pre-revenue early-stage biopharmaceutical companies whose most important assets are their IP,” he said. Investor concerns are already impacting investment. “Stock prices of SME biotech firms that have invested in COVID-19 related R&D have on average suffered more (-73 percent) than the average stock in the U.S. (-5.4 percent) and more than the average SME biotech company not working on COVID-19 related R&D (-55 percent) since February 2021,” he testified. Along with preventing the pursuit of innovative treatments, the threat of a waiver also harms a vital segment of the U.S. economy. “The innovative U.S. biotech sector” directly employs 2.14 million, and contributes 10.3 million additional jobs. It has a $2.9 trillion impact on the U.S. economy, Sullivan said. “Reduced investment, brought on by increased risk to underlying IP assets, will affect research and manufacturing jobs in the United States and undermine our ability to harness the innovative potential of the U.S. private sector to timely and robustly respond to future global public health challenges.” Congress members concur “Unbridled enthusiasm as we have seen with the TRIPS waiver leads to unbridled disaster,” said Rep. Greg Murphy, M.D. (R-NC). “I can’t think of anything more destructive than the TRIPS waiver for American innovation.” He added that weakening IP rights is not only harmful to business. “It is an absolute national security issue.” Rep. Brad Schneider (D-IL) credited strong IP protections with enabling the United States to lead in the fight against COVID-19. “I’m proud of the fact that as the world looks for inoculations for vaccines for COVID, it’s the U.S. who led that way. And as the world looks for treatments, it is the U.S. that continues to lead the way,” he said. “It’s our intellectual property system.” “Recent independent analysis by the International Trade Commission (ITC) found that IP is not a barrier to access for COVID-19 treatments,” said Chair Smith, referring to a report by the USITC. Sullivan agreed. “With news of the WHO declaring the end of the COVID-19 public health emergency on May 5, 2023, and with global supply of therapeutics far exceeding demand, a waiver is wholly unnecessary,” said Sullivan. It’s obvious the proposed waiver is not based on public health concerns, he added. “Rather, the debate suggests that proponents of the waiver are keen on leveraging the COVID pandemic to achieve a goal that has been decades in the making—the radical undermining of the existing global IP rights system.”

On the other side, proponents of PERA argue that it addresses three key problems with Alice/Mayo. First, they assert that the Alice/Mayo test is vague and unpredictable, which hampers start-ups, reduces investment, and ultimately undermines innovation. Kimberly A. Moore, chief judge of the U.S. Court of Appeals for the Federal Circuit, expressed that Federal Circuit judges were “at a loss” in how to apply the current patent eligibility provisions. Some IP legal professionals claim that they are unable to provide clear guidance to businesses due to Alice/Mayo. Legal uncertainty ultimately hampers economic activity, and uncertainty in patent eligibility may lead investors to avoid companies with patents in fields strongly impacted by Alice/Mayo such as life sciences and information technology.

Second, proponents of PERA argue that Alice/Mayo unduly restricts what is patent-eligible. In the biotechnology industry for instance, stakeholders contend that Alice/Mayo constrains their capacity to secure patents for diagnostic methods and personalized medicine, ultimately reducing the economic viability of developing these new technologies. Further, some of the subject matter rendered unpatentable by Alice/Mayo is patent-eligible in Europe, China, and other jurisdictions, potentially diverting R&D investment away from the United States and undermining the competitiveness of U.S. businesses.