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STUDY: Counterfeit Goods May Actually Benefit the Economy

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Knock-off goods have been a near-unavoidable fact of life for companies from Nike to Gucci to Philip Morris.

The International Chamber of Commerce "estimates that the value of counterfeit and pirated products worldwide is about $600 billion, and projects that figure to double by 2015," according to the Wall Street Journal.

Of course, there are some fakes on which placing a dollar value is slightly more difficult -- like the ersatz version of Hallstatt, an Austrian mountain town of 800 that is being replicated nearly stone-for-stone in Guangdong Province, China.



Representatives from the real estate arm of Chinese Minmetals Corporation, a mining concern, approached an Austrian economic delegation to inquire about "arranging a partnership" between Hallstatt and the city of Huizhou, Der Spiegel explains. But, as the Independent reports, the partnership was a ruse to obtain access to architectural drawings and plans that would make an exact replica of the burg back home -- even as "nobody in the picturesque tourist magnet in the heart of Austria's Salzkammergut had any idea the Chinese planned such a project, let alone that they would go ahead and build it."

"The people are not very amused that this has happened behind their backs," Hallstatt mayor Alexander Scheutz said. "But I found myself confronted with a fait accompli. I am stunned."

A hotel owner in Hallstatt said residents were "outraged -- not about the fact but the approach."

"I don't like the idea a team was here for years measuring, photographing and studying us," she said. "I would have expected them to approach us directly -- the whole thing reminds me of Big Brother."

However, Mayor Scheutz admits the phony Hallstatt "could be a tourism motor," though he he "still understands the discomfort some residents might have with their homes being cloned."

And Pamela Binder, head of the region's tourism association, believes the fake town is a "gift" and a "great advertisement" for Hallstatt.

Crazy? Maybe not.

In a study titled Counterfeiters: Foes or Friends? (NBER Working Paper No. 16785), author Yi Qian finds that counterfeits might "have positive advertising effects for the brand of shoes they copy."

"For sales of high-end authentic products, the positive advertising effect dominates the substitution effect," the abstract points out. On the other hand, for sales of "low-end authentic products, the negative substitution effect outweighs the advertising effect."

These conditions "last for a few years before leveling off," and Yi maintains that the "different effects for different products reinforce incentives for authentic producers to innovate and to move upward in the quality portfolio," causing the "market shares for the higher quality products increase while those of the lower end products decline." Ultimately, the "presence [of counterfeits] has positive spillover effects for high-end authentic products," claims Yi.

Will Huizhou's "Hallstatt" have a "positive spillover effect" on the genuine article?

That remains to be seen, although Crystal He, a spokeswoman for Chinese Minmetals, seems to believe the Chinese facsimile already has a built-in customer base.

As He told the Associated Press, the developers aren't limiting themselves to the Chinese tourism market.

"Homesick Caucasian people from Hong Kong will like it as well," she said.
POSITION:  No positions in stocks mentioned.

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