Blockchain Adoption to Fight Counterfeiting at the Source in a Vertically Differentiated Competition

The proliferation of counterfeit products poses a substantial threat to numerous industries. Blockchain technology (BCT) offers an effective solution for product traceability, providing a means to combat counterfeiting. However, BCT can verify the authenticity of the information but cannot confirm the veracity of the product itself, a problem known as counterfeiting at the source. To our knowledge, this issue has yet to be studied. The security level of BCT traceability is used to indicate its ability to combat counterfeiting. We establish game-theoretical models to investigate BCT adoption strategies for a typically authentic firm and a premium firm to fight counterfeiting in a vertically differentiated competition. This study demonstrates that BCT reduces deceptive counterfeiters’ incentive to pool with the branded firm and mitigates the negative impact of asymmetric information on the prices, market share, and profits of authentic products in a monopoly. In instances where the proportion of counterfeits is substantial, premium products will lose market share, a phenomenon often referred to as “bad money driving out good money.” In a vertically differentiated competition, if the quality of the premium product is below a certain threshold, it is recommended that the premium firm be the first to adopt BCT, while the typically authentic firm should not follow (Scenario NB). That is, Scenario NB is a win-win situation for both firms in the competition. The premium firm that has adopted BCT can offer a “free ride” to the typically authentic firm.