Dennis D. McDonald ( consults from Alexandria Virginia. His services include writing & research, proposal development, and project management.

OECD Publishes Report on International Counterfeiting and Piracy

By Dennis D. McDonald

The OECD has published the Executive Summary of a major report on international trade involving counterfeited and pirated products. The report,  The Economic Impact of Counterfeiting and Piracy, estimates that international trade in 2005 involving counterfeit or pirated works totalled $200 billion US.

This excludes “non-tangible pirated digital products being distributed via the Internet” as well as domestically produced and consumed pirate and counterfeit goods. It includes physical products of many kinds including spare parts, pharmaceuticals, toys, clothing, and jewelry. If the two excluded categories were included, the report suggests that would have added “several hundred billion dollars more.” The report also states that Asia is the largest source for counterfeit and pirated products, with China as the single largest source economy.

The report does not dwell at length on digital works and does not provide industry detail as did as another OECD report, the OECD’s “Digital Broadband Content: Music” Report. It does successfully describe the wide ranging nature of piracy and counterfeiting. The report provides the following definition:

Counterfeiting and piracy are terms used to describe a range of illicit activities linked to intellectual property rights (IPR) infringement. The work that the OECD is conducting focuses on the infringement of IPRs described in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS); it includes trademarks, copyrights, patents, design rights, as well as a number of related rights.

Two kinds of markets for pirated works are defined:

The market for counterfeit and pirated products can be divided into two important sub-markets. In the primary market, consumers purchase counterfeit and pirated products believing they have purchased genuine articles. The products are often sub-standard and carry health and safety risks that range from mild to life-threatening. In the secondary market, consumers looking for what they believe to be bargains knowingly buy counterfeit and pirated products. The policies and measures to combat counterfeiting and piracy in the two markets differ; it is therefore important to know how much of a threat each poses when considering product-specific strategies.

The report also discusses how important the Internet and eCommerce have become in supporting international counterfeiting and piracy:

The Internet has provided counterfeiters and pirates with a new and powerful means to sell their products via auction sites, stand-alone e-commerce sites and email solicitations. The online environment is attractive to counterfeiters and pirates for a number of reasons, including the relative ease of deceiving consumers and the market reach.  

While this 25-page Executive Summary provides little detail on the model-based estimates of counterfeiting, it does provide much in the way of defining and categorizing the economic, social, and criminal aspects of international activities. I found particularly interesting the discussion of the costs of combating counterfeiting and piracy.:

As indicated below, rights holders incur a variety of costs when combating counterfeiting and piracy. It should be noted that, because these costs are remedial in nature, these do not translate into higher quality products, product innovation or other enhancements and can therefore be considered pure social loss.

 This statement is followed by the following table (click to see full size):


One of the things I realized in looking at this table is that it might also be used as the basis for beginning to categorize the costs associated with supporting digital rights management (DRM) enforcement schemes, as I originally discussed in Is DRM a “Tax” on the Intellectual Property Supply Chain? and in Followup to “Is DRM a ‘Tax’ on the Intellectual Property Supply Chain?”. The idea raised there was to wonder how the costs of enforcing digital rights management approaches are actually outweighed by the benefits.

It is interesting to apply the same type of question to the counterfeiting and piracy problems defined by this OECD report. How do you define the costs, and how do you define the benefits? Moreover, if you are dealing with illegal activities (as I assume we are when we are discussing the issues raised in this OECD report), at what point in the discussion of enforcement is it appropriate to discuss costs and benefits?

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