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October 19, 2007
The problem with valuation - the counterfeit example
The Numbers Guy in the Wall Street Journal has taken off on the valuation of intangibles - Efforts to Quantify Sales of Pirated Goods Lead to Fuzzy Figures:
Counterfeit and pirated goods are a big problem for global business, costing hundreds of billions of dollars, according to manufacturers and trade groups. But their estimates tell more about how difficult it is to assign a value to lost sales than about the actual size of the counterfeiting problem.
The main problem he points out is the lack of good data. Those selling pirated goods don't report their sales and extrapolations from products seized by the Customs Service at the border are iffy.
But there is another issue which he doesn't mention: the pricing problem. Most of these estimates of counterfeiting assume full manufacturers suggested retail price (at least the one's I've seen). But counterfeits usually sell on the street at deep discounts. The purpose of using full retail price rather than street value is to estimate the size of the loss to the manufacturer -- not to understand the size of the economic activity. But to use full retail value, you have to assume that customers would purchase the product at full retail value if the counterfeit was not available. That is simply an unrealistic assumption.
To go back to the problem facing the valuation of intangibles - economist generally believe that something is worth what the market says it is worth. If a copy of the Lion King sells in China for $1, then that is what it is worth (and Disney has a good case for collecting some portion of that dollar in royalties). With many intangibles however, there is no market price - or very thin markets with volatile pricing. One is left with constructing prices. For example, the intangible value of a Rolex might be the difference between what it sells for retail and what a fake Rolex sells for on the street. I guess I would put as much credibility into that number, however, as I do to the estimates of the cost of counterfeiting.
For more on the piracy data, see the Number Guys blog discussion - The Numbers Guy : What's the Real Cost of Counterfeiting? - where he cites the studies and provides links to at least one study on the benefits, in consumer surplus terms, of counterfeiting.
Posted by Ken Jarboe at October 19, 2007 08:54 AM
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