Illicit Trade and the Korean Economy

Annex B. Primary and secondary markets

In order to distinguish fake products for sale by counterfeiters on the primary market from those intended for sale on the secondary market, the price difference between both types of counterfeits is calculated. For each seizure entered into the WCO and DG TAXUD databases, customs authorities report the infringed trademark, the declared value of goods, the quantity seized and the product’s harmonised system (HS) code. This allows the unit value of each seized “product type-brand” pair to be determined (“brand” includes the associated trademark or patent). These unit values can then serve as a proxy for the retail prices of fake goods.

For each type of product associated with a given trademark or patent, the prices of seized goods are used to estimate a confidence interval that contains the actual retail price of the corresponding genuine item. Counterfeit items whose unit price, calculated as described above, is higher than or included in this interval are then classified as intended for sale on the primary market. Those whose price is below this interval are classified as targeting the secondary market.

Formally, let ${\text{s}}_{\text{c}}$ and ${\stackrel{-}{\text{s}}}_{\text{c}}$ denote, respectively, the import value and quantity of any custom seizure of counterfeit products, with$c \in \{<!--\; -->1, \dots , N\}$the range of customs seizures and$\text{ N}$ their total number. $p_c= s_c/{\stackrel{-}{s}}_c$ then refers to the unit value of each custom seizure and can serve as a proxy for their unit price. Let $p_{bp}=\left(\sum _{c\in \{<!--\; -->bp\}}{p}_c\right)/N_{bp}$ defines the (unweighted) price average of any type of product $p$ associated with the brand or patent $b$, with $N_{bp}$ the total number of custom seizures reported for this “product category-brand” combination. The standard deviation of this price is denoted ${\sigma }_{bp}$.

$X_c$ is defined as a dichotomous (binary) variable that takes the value of 0 if the fake goods included in the seized shipment were intended to be sold on the primary market, or 1 if they were intended to be sold on the secondary market. In accordance with the arguments mentioned in the main text, $X_c$ is assumed to be defined as follows:

$X_c=\{<!--\; -->\begin{array}{c}=0 \text{i}\text{f} p_c\in \left[p_{bp}-\frac{1.96\times {\sigma }_{bp}}{\sqrt{N_{bp}}}; \underset{\mathit{cϵ}\{<!--\; -->\mathit{bp}\}}{\max }{p}_c\right]\\ =1 \text{i}\text{f} p_c ϵ\left[\underset{\mathit{cϵ}\{<!--\; -->\mathit{bp}\}}{\min }{p}_c; p_{bp}-\frac{1.96\times {\sigma }_{bp}}{\sqrt{N_{bp}}}\right[ \end{array}; \forall c\{<!--\; -->bp\}$

It follows that the share of products sold on the primary market can be calculated by product category, ${\tau }_p^1$, and/or for the entire mass of fake imports, and is given by:

${\tau }_p^1 =\left({\sum }_b{\sum }_c{X}_c{s}_c\right)/\left({\sum }_b{\sum }_c{s}_c\right), \forall cϵ\{<!--\; -->bp\}$