Fake Fashion - The Economics Behind Protecting Luxury Brands


Sevin Karabulut & Maaruf Khan



Image: (created using OpenAI’s DALL.E)

The increase in counterfeit fashion poses a significant issue to luxury markets, undermining their value and harming economies’ reliance on tax revenue and exports. In response, fashion capitals, such as Italy and France, have intensified rules and regulations regarding those caught travelling with or wearing counterfeit goods. Using France as a case study, this blog will explore the economic rationale behind harsh policies and how they link to taxation and government revenue. The economic theory used will be from Week 4.

This blog is a collaboration between Maaruf Khan and Sevin Karabulut. We will bring together our interest in economics and its application in real-world issues.

Before discussing the issue, we will first begin by explaining taxation, its impact, and its importance. Tax is a mandatory payment collected by the government from individuals or businesses to cover public costs and services. Taxes have a large impact on supply and demand, and welfare economics. As shown in the diagram below, the tax imposed on a company causes price to increase from P1 to P2, decreasing consumer surplus. P3 represents the revenue per unit earned from the producers, which is lower than the original price. Tax revenue collected by the government is represented in the rectangle (P2-P3). The tax imposed has caused a deadweight loss. This refers to the economic inefficacy, represented by money that is lost within the market, as seen through the yellow triangle.



Image: (Intelligent Economist, 2024)

While taxes do create a deadweight loss as mentioned, they are crucial as they generate revenue for public expenditure and investments. Moreover, taxes regulate markets to discourage spending on goods whose production or consumption results in negative externalities, such as cigarettes and alcohol. Alternatively, governments can tax luxury markets heavily, as it is wealthier individuals who allocate more of their income to luxury goods, and where the goods are more inelastic, thus demand and supply will not be affected as much. This is shown on the graph, as despite a large increase in price from P* to P1, quantity demanded has reduced substantially less from Q* to Q1.

 

 Image: (Hernández, 2018)

The increase in counterfeit fashion has become a significant issue for luxury markets; their value is eroding and counterfeit goods undermine the government’s ability to collect tax revenue. As mentioned, this blog will use France as an example. Luxury goods in France form a substantial part of their economy, and thus counterfeiting directly impacts the country’s GDP. This is clear as luxury brands in France form around 10% of their GDP, thus also demonstrating the significant role the luxury and fashion industry has in collecting tax. When counterfeit goods flood the market, they dilute the value and reduce demand, ultimately, cutting into Value Added Tax (VAT) revenue (20%). This is shown as counterfeit branding has been estimated to cost French companies 1.7 billion euros in lost sales annually from 2018 to 2021 (EUIPO, 2024). The economic impact of counterfeit goods is not only limited to sales but also extends to employment. The EUIPO also revealed that an estimated 160,000 jobs in the clothing sector alone were lost due to counterfeiting in various European countries from 2018 to 2021 (EUIPO, 2024). This, therefore, further affects tax revenue as governments cannot receive income tax.

In response, France has implemented strict laws against the possession and sale of counterfeit goods. For example, buying or carrying a counterfeit product is a criminal offence and is punishable by up to 3 years imprisonment and a 300,000 Euro fine (IPO, 2024). This applies to locals and tourists who are on French territory with possession of a counterfeit good. These regulations, rightly so, protect the intellectual property of the luxury companies’ brands, but also safeguard the economic contribution of the goods to France’s GDP and tax revenue.


References:

 EUIPO (2024) Counterfeit goods cost EU industries billions of euros and thousands of jobs annually. European Union Intellectual Property Office. Available at: https://www.euipo.europa.eu/en/news/counterfeit-goods-cost-eu-industries-billions-of-euros-and-thousands-of-jobs-annually (Accessed: 20 November 2024).

Intellectual Property Office (2020) IPO counterfeit goods research. Available at: https://www.gov.uk/government/publications/ipo-counterfeit-goods-research/ipo-counterfeit-goods-research (Accessed: 20 November 2024).

Hernández, M., 2018. Deadweight loss on a market with excise tax as a function of the price elasticity of demand and supply. [online] Available at: https://www.researchgate.net/figure/Deadweight-loss-on-a-market-with-excise-tax-as-a-function-of-the-price-elasticity-of_fig1_354314549 (Accessed 20 November 2024).

Intelligent Economist, 2024. Deadweight loss: Definition, graph, and example. [online] Available at: https://www.intelligenteconomist.com/deadweight-loss/ (Accessed 20 November 2024). 


 About the Authors:

Sevin Karabulut:

Sevin is a Business with Law student in her second year. With an interest in law, economics, and business operations, she will aim to explore ways the law influences economic policies and current affairs.

Contact information for any questions or collaboration: bs23254@qmul.ac.uk

Maaruf Khan:

Maaruf is a second-year Business and Management student.

Contact information for any questions m.khan@hss23.qmul.ac.uk

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