Intellectual Property: Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods
Published: 2010-04-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In October 2008, Congress passed the Prioritizing Resources and Organization for Intellectual Property Act of 2008 (PRO-IP Act), to improve the effectiveness of U.S. government efforts to protect intellectual property (IP) rights such as copyrights, patents, and trademarks. The act also directed GAO to provide information on the quantification of the impacts of counterfeit and pirated goods. GAO (1) examined existing research on the effects of counterfeiting and piracy on consumers, industries, government, and the U.S. economy; and (2) identified insights gained from efforts to quantify the effects of counterfeiting and piracy on the U.S. economy. GAO interviewed officials and subject matter experts from U.S. government agencies, industry associations, nongovernmental organizations, and academic institutions, and reviewed literature and studies quantifying or discussing the economic impacts of counterfeiting and piracy on the U.S. economy, industry, government, and consumers. GAO is making no recommendations in this report.
section_title: What GAO Found
paragraphs: According to experts and literature GAO reviewed, counterfeiting and piracy have produced a wide range of effects on consumers, industry, government, and the economy as a whole, depending on the type of infringements involved and other factors. Consumers are particularly likely to experience negative effects when they purchase counterfeit products they believe are genuine, such as pharmaceuticals. Negative effects on U.S. industry may include lost sales, lost brand value, and reduced incentives to innovate; however, industry effects vary widely among sectors and companies. The U.S. government may lose tax revenue, incur IP enforcement expenses, and face risks of counterfeits entering supply chains with national security or civilian safety implications. The U.S. economy as a whole may grow more slowly because of reduced innovation and loss of trade revenue. Some experts and literature also identified some potential positive effects of counterfeiting and piracy. Some consumers may knowingly purchase counterfeits that are less expensive than the genuine goods and experience positive effects (consumer surplus), although the longer-term impact is unclear due to reduced incentives for research and development, among other factors. Three widely cited U.S. government estimates of economic losses resulting from counterfeiting cannot be substantiated due to the absence of underlying studies. Generally, the illicit nature of counterfeiting and piracy makes estimating the economic impact of IP infringements extremely difficult, so assumptions must be used to offset the lack of data. Efforts to estimate losses involve assumptions such as the rate at which consumers would substitute counterfeit for legitimate products, which can have enormous impacts on the resulting estimates. Because of the significant differences in types of counterfeited and pirated goods and industries involved, no single method can be used to develop estimates. Each method has limitations, and most experts observed that it is difficult, if not impossible, to quantify the economy-wide impacts. Nonetheless, research in specific industries suggest that the problem is sizeable, which is of particular concern as many U.S. industries are leaders in the creation of intellectual property.

section_title: Letter
paragraphs: In October 2008, Congress passed the Prioritizing Resources and  Organization for Intellectual Property Act of 2008 (PRO-IP Act) (P.L. 110- 403), to strengthen and improve the effectiveness of U.S. government  efforts to protect the intellectual property (IP) of U.S. industries and IP  rights holders. In the PRO-IP Act, Congress noted that U.S. IP industries  have created millions of highly skilled, high-paying U.S. jobs and continue  to represent a major source of creativity, innovation, economic growth,  and competitiveness.
The PRO-IP Act directed GAO to provide information on the quantification  of the impacts of counterfeit and pirated goods on the economy and  industries of the United States to help the U.S. government better protect  the IP of rights holders. Our work: (1) examined existing research on the  effects of counterfeiting and piracy on consumers, industries, government,  and the U.S. economy; and (2) identified insights gained from efforts to  quantify the effects of counterfeiting and piracy on the U.S. economy.
To address these objectives, we interviewed officials and representatives  from U.S. government agencies, industry associations, nongovernmental  organizations, academic institutions, and a multilateral organization, and  we reviewed documents and studies quantifying or discussing the impacts  of counterfeiting and piracy on the U.S. economy, industry, government,  and consumers. We met with officials and reviewed documents from the  Departments of Justice (Justice), Homeland Security (DHS), Commerce  (Commerce), and Health and Human Services (HHS), the Office of the U.S.  Trade Representative (USTR), and the International Trade Commission  (ITC). We conducted a literature search of studies and estimates of the  economic impact of IP infringements published since 1999 to examine  various aspects of the economic impacts of counterfeiting and piracy, and  to identify other insights about the role IP plays in the U.S. economy.  Among the studies we reviewed was the Organization for Economic  Cooperation and Development’s (OECD) 2008 report, The Economic  Impact of Counterfeiting and Piracy. Although this study was global  rather than focused on the U.S. economy, its unique nature and  prominence as the most comprehensive attempt to quantify the impacts of  counterfeiting and piracy warranted its inclusion within our reviews. We  also interviewed subject matter experts from a range of governmental,  nongovernmental, academic and industry sources, and OECD officials to  discuss efforts to quantify the economic impacts of counterfeiting and  piracy and to obtain their views on the range of impacts of counterfeits  and piracy, insights on counterfeiting activities and markets, and the role  of IP in the U.S. economy. Unless otherwise noted, in our discussion of the  impacts and insights on counterfeiting and piracy, we do not distinguish  between imported counterfeit and pirated goods and those produced  domestically. The literature we reviewed and experts we spoke with  focused primarily on imported counterfeit goods rather than those  produced within the United States. We determined that the U.S.  government did not systematically collect data and perform analysis on  the impacts of counterfeiting and piracy on the U.S. economy and, based  on our review of literature and interviews with experts, we concluded that  it was not feasible to develop our own estimates or attempt to quantify the  economic impact of counterfeiting and piracy on the U.S. economy. We  shared a copy of the draft report with officials from Commerce, DHS,  HHS, Justice, ITC, USTR, and the Office of the U.S. Intellectual Property  Enforcement Coordinator to obtain technical comments. We received  comments from the DHS and Justice, and the Office of the U.S. Intellectual  Property Enforcement Coordinator and made changes as appropriate.
We conducted our work from April 2009 to April 2010 in accordance with  all sections of GAO’s Quality Assurance Framework that are relevant to  our objectives. The framework requires that we plan and perform the  engagement to obtain sufficient and appropriate evidence to meet our  stated objectives and to discuss any limitations to our work. We believe  that the information and data obtained, and the analysis conducted,  provide a reasonable basis for any findings and conclusions in this  product. For additional details regarding our scope and methodology, see  appendix I.
subsections: section_title: Background
subsections: section_title: Importance of Protection for Innovators Has Long Been Recognized in the United States
paragraphs: The importance of patents and other mechanisms to enable inventors to  capture some of the benefits of their innovations has long been recognized  in the United States as a tool to encourage innovation, dating back to  Article 1 of the U.S. Constitution and the 1790 patent law. Ensuring the  protection of IP rights encourages the introduction of innovative products  and creative works to the public. Protection is granted by guaranteeing  proprietors limited exclusive rights to whatever economic reward the  market may provide for their creations and products.
Today, eight federal agencies and entities within them undertake the  primary U.S. government activities in support of IP rights. These agencies  and entities include Commerce, HHS, DHS, Justice, ITC, State, USTR, the  Copyright Office, and entities such as Customs and Border Protection  (CBP), the U.S. Patent and Trademark Office, and the Federal Bureau of  Investigation (FBI).
In addition to domestic efforts for protecting IP, the U.S. government  participated actively in negotiating the World Trade Organization’s (WTO)  Agreement on Trade-Related Aspects of Intellectual Property Rights  (TRIPS), which came into force in 1995 and broadly governs the  multilateral protection of IP rights. Under TRIPS, all WTO member  countries are obligated to establish laws and regulations that meet a  minimum standard for protecting various areas of IP rights. It also  provides for enforcement measures for members. One of USTR’s priorities  in recent years has been negotiating free trade agreements. Since 2000,  USTR has completed negotiations for free trade agreements that have  entered into force with Australia, Bahrain, Central America, Chile, Jordan,  Morocco, Oman, Peru, and Singapore. According to officials at USTR,  these agreements offer protection beyond that required in TRIPS.
Intellectual property is an important component of the U.S. economy, and  the United States is an acknowledged global leader in the creation of  intellectual property. According to the USTR, “Americans are the world’s  leading innovators, and our ideas and intellectual property are a key  ingredient to our competitiveness and prosperity.” The United States has  generally been very active in terms of advocating strong IP protection and  encouraging other nations to improve these systems for two key reasons.  First, the U.S. has been the source of a large share of technological  improvements for many years and, therefore, stands to lose if the  associated IP rights are not respected in other nations. Secondly, a  prominent economist noted that IP protection appears to be one of the  factors that has helped to generate the enormous growth in the world  economy and in the standard of living that has occurred in the last 150  years. This economist pointed out that the last two centuries have created  an unprecedented surge in growth compared to prior periods. Among the  factors attributed to creating the conditions for this explosion in economic  growth are the rule of law, including property rights and the enforceability  of contracts.
While these conditions are clearly important for generating economic  growth, determining the contributions of innovation to economic growth  at the level of the overall economy has been a challenging task.  Economists have used a variety of techniques to better understand the role  of innovation in growth, and historical evidence shows that growth rates  have periodically been driven upward by major technological  improvements, beginning with the industrial revolution and the role of  electricity, and continuing with the current revolution in information  technology.
section_title: Common Protections Related to IP
paragraphs: Generally, individual countries grant and enforce IP rights. IP is any  innovation, commercial or artistic, or any unique name, symbol, logo, or  design used commercially. IP rights protect the economic interests of the  creators of these works by giving them property rights over their  creations.
Copyright. A set of exclusive rights subsisting in original works of  authorship fixed in any tangible medium of expression now known or later  developed, for a fixed period of time. For example, works may be literary,  musical, or artistic.
Trademark. Any sign or any combination of signs capable of  distinguishing the source of goods or services is capable of constituting a  trademark. Such signs— in particular, words (including personal names),  letters, numerals, figurative elements, and combinations of colors, as well  as any combination of such signs— are eligible for registration as  trademarks.
Patent. Exclusive rights granted to inventions for a fixed period of time,  whether products or processes, in all fields of technology, provided they  are new, not obvious (involve an inventive step), and have utility (are  capable of industrial application). “Pirated copyright goods” refer to any goods that are copies made without  the consent of the right holder or person duly authorized by the right  holder. “Counterfeit goods” refer to any goods, including packaging or  bearing without authorization, a trademark that is identical to a trademark  validly registered for those goods, or that cannot be distinguished in its  essential aspects from such a trademark, and that, thereby, infringes the  rights of the owner of the trademark in question. According to the U.S.  Food and Drug Administration (FDA), “counterfeit drugs” are defined  under U.S. law as those sold under a product name without proper  authorization, where the identity of the source drug is knowingly and  intentionally mislabeled in a way that suggests that it is the authentic and  approved product.
section_title: Counterfeiting and Piracy Cover a Wide Range of Goods
paragraphs: CBP data show that between fiscal years 2004 and 2009, the domestic  value and number of U.S. seizures of counterfeit goods imported from  other countries have fluctuated. These seizures have been concentrated  among certain types of products. For example, seizures of footwear,  wearing apparel, and handbags accounted for about 57 percent of the  aggregate domestic value of goods seized in those 6 years. Table 1 shows  the percent of total domestic value for different types of commodities  seized as well as the domestic value of all goods seized and total number  of seizures. The value of wearing apparel and cigarette seizures generally  declined, while the value of pharmaceutical seizures generally increased.  Several factors influence trends in seizure values. For example, values of  seized goods can vary from year to year due to counterfeiters’ responses to  changes in marketplace demand or enforcement actions. For instance, in  fiscal year 2006, a federal enforcement investigation resulted in the seizure  of 77 cargo containers of counterfeit Nike Air Jordan shoes and one  container of counterfeit Abercrombie & Fitch clothing. The estimated  domestic value of these goods was about $19 million, representing about  12 percent of the total domestic seizure value that year. In addition, the  level of federal border enforcement effort varies across ports, resulting in  different seizure rates, which is discussed in a later section of this report.
According to CBP data, seized counterfeit goods are dominated by  products from China. During fiscal years 2004 through 2009, China  accounted for about 77 percent of the aggregate value of goods seized in  the United States. Hong Kong, India, and Taiwan followed China,  accounting for 7, 2, and 1 percent of the seized value, respectively. CBP  data indicate certain concentrations of counterfeit production among  these countries: in 2009, about 58 percent of the seized goods from China  were footwear and handbags; 69 percent of the seized goods from Hong  Kong were consumer electronics and watch parts; 91 percent of the seized  goods from India were pharmaceuticals and perfume; and 85 percent of  seized goods from Taiwan were computers and consumer electronics. CBP  data show that goods were also seized frequently from Russia, Korea,  Pakistan, Vietnam, and certain Southeast Asian countries. Unlike imported  counterfeits, there is little information on the extent and sources for  domestically produced counterfeits. According to the Congressional  Research Service, the United States is especially concerned with foreign  counterfeits of U.S. intellectual property. Compared to foreign countries,  counterfeits produced in the United States are estimated to be relatively  low.
Another significant aspect of IP infringement is the piracy of digital  copyrighted products, which is not captured by CBP seizure data. The  development of technologies that enable the unauthorized distribution of  copyrighted works is widely recognized as leading to an increase in piracy.  The rapid growth of Internet use, in particular, has significantly  contributed to the increase. Digital products are not physical or tangible,  can be reproduced at very low cost, and have the potential for immediate  delivery through the Internet across virtually unlimited geographic  markets. Sectors facing threats from digital piracy include the music,  motion picture, television, publishing, and software industries. Piracy of  these products over the Internet can occur through methods including  peer-to-peer networks, streaming sites, and one-click hosting services.  There is no government agency that systematically collects or tracks data  on the extent of digital copyright piracy.
These technological developments, along with an increase in the  sophistication of packaging for counterfeit goods, have changed the nature  of counterfeiting and piracy substantially in recent years. Industry  associations with whom we met commented that technological changes  and increased sophistication among counterfeiters have affected their  businesses significantly.
section_title: Counterfeiting and Piracy Have a Wide Range of Effects on U.S. Consumers, Industry, Government, and the Economy
paragraphs: According to experts we spoke with and literature we reviewed,  counterfeiting and piracy have produced a wide range of effects on  consumers, industry, government, and the economy as a whole, depending  on the type of infringements involved and other factors. Most of the  information and views we obtained from our interviews and literature  review focused on the significant direct negative effects of counterfeiting  and piracy on stakeholders, including health and safety risks, lost  revenues, and increased costs of protecting and enforcing IP rights.  However, some experts and literature point out that certain stakeholders  may experience some positive effects from counterfeits and piracy, though  there is little information available on potential positive effects. Table 2  summarizes the positive and negative effects by stakeholder, based on our  discussions with experts and literature we reviewed.
subsections: section_title: Consumer Effects Include Danger to Health and Safety
paragraphs: A commonly cited concern about counterfeit trade is that certain types of  counterfeit goods can have harmful effects on consumers’ health and  safety, causing serious illness or death. Experts we spoke with and  literature we reviewed identified certain counterfeit products, such as  pharmaceuticals, automotive parts, electrical components, toys, and  household goods, as having potentially damaging health and safety effects.  According to experts we spoke with, a key characteristic of these types of  counterfeit goods, which distinguishes their effects from other types of  counterfeiting or piracy, is that U.S. consumers are likely to have been  deceived about the origin of the product. In addition, some studies and an  expert reported that counterfeiters have increasingly diversified beyond  their traditional products, such as luxury goods, to more functional  products such as baby shampoo and household cleaners, and will continue  to expand their product portfolios since the profit incentives are large.  Examples of the types of counterfeit products that may have negative  health and safety effects on consumers are presented below.
Counterfeit pharmaceuticals may include toxic or nonactive ingredients,  correct ingredients in incorrect quantities, or other mislabeling. These  products can be ineffective in treating ailments or may lead to adverse   reactions, drug resistance, or even death. The FDA has specifically  highlighted and issued warnings to U.S. consumers on the dangers of  buying prescription drugs over the Internet.
Counterfeit automotive products may be substandard. A representative of  a U.S. automotive parts supplier stated that it tested a supply of  counterfeit timing belts that did not meet industry safety standards and  could potentially impair the safety of vehicles.
Counterfeit or pirated software may threaten consumers’ computer  security. The illegitimate software, for example, may contain malicious  programming code that could interfere with computers’ operations or  violates users’ privacy.
section_title: Effects Vary Across Industries and Include Lost Sales and Reduced Incentives to Innovate
paragraphs: Counterfeit or pirated products that act as substitutes for genuine goods  can have a wide range of negative effects on industries, according to  experts we spoke with and literature we reviewed. These sources further  noted that the economic effects vary widely among industries and among  companies within an industry. The most commonly identified effect cited  was lost sales, which leads to decreased revenues and/or market share.  Many industries lose sales because of consumers’ purchases of counterfeit  and pirated goods, particularly if the consumer purchased a counterfeit  when intending to purchase a genuine product. In such cases, the industry  may lose sales in direct proportion to the number of counterfeit products  that the deceived consumers purchased. Industries in which consumers  knowingly purchase counterfeits as a substitute for the genuine good may  also experience lost sales. For example, recording companies have lost  sales on a wide scale as a result of pirated music distributed over the  Internet and producers of high-end fashion goods have lost sales from  purchases of counterfeit goods made to look similar to genuine products.
Lost revenues can also occur when lower-priced counterfeit and pirated  goods pressure producers or IP owners to reduce prices of genuine goods.  In some industries, such as the audiovisual sector, marketing strategies  must be adjusted to minimize the impact of counterfeiting on lost  revenues. Movie studios that use time-related marketing strategies— introducing different formats of a movie after certain periods of time— have reduced the time periods or “windows” for each format as a  countermeasure, reducing the overall revenue acquired in each window.  Experts stated that companies may also experience losses due to the  dilution of brand value or damage to reputation and public image, as  counterfeiting and piracy may reduce consumers’ confidence in the  brand’s quality. Consumers who are unaware that a product is counterfeit  may blame the manufacturer of the legitimate good for negative effects of  the fake. Some manufacturers learn of the existence of counterfeit  versions of their products from returns of inferior counterfeit goods.
Companies are affected in additional ways. For example, to avoid losing  sales and liability issues, companies may increase spending on IP  protection efforts. In addition, experts we spoke with stated that  companies could experience a decline in innovation and production of  new goods if counterfeiting leads to reductions in corporate investments  in research and development. Another variation in the nature of the effects  of counterfeiting and piracy is that some effects are experienced  immediately, while others are more long-term in nature, according to the  OECD. The OECD’s 2008 report cited loss of sales volume and lower  prices as short-term effects, while the medium- and long-term effects  include loss of brand value and reputation, lost investment, increased  costs of countermeasures, potentially reduced scope of operations, and  reduced innovation.
Finally, one expert emphasized to us that the loss of the IP rights is much  more important than the loss of revenue. He stated that the danger for the  United States is in the accelerated “learning effects”—companies learn  how to produce and will improve upon these goods. They will no longer  need to illegally copy a given brand—they will be in the aftermarket. He  suggested that companies should work to ensure their competitive  advantage in the future by inhibiting undesired knowledge transfer.
section_title: U.S. Government Loses Tax Revenue, Incurs Enforcement Expenses, and Faces Risks to Supply Chains
paragraphs: Many of the experts we interviewed identified lost tax revenue as an effect  of counterfeiting and piracy on governments. IP owners or producers of  legitimate goods who lose revenue because of competition from  counterfeiters pay less in taxes. The U.S. government also incurs costs due  to IP protection and enforcement efforts. Researchers have found  anecdotal evidence that organized criminal and terrorist organizations are  involved in counterfeiting and piracy. A 2009 RAND Corporation study, for  example, presented case studies showing the involvement of organized  crime or terrorist groups involved in film piracy to generate funding for  their activities. Because criminal networks are involved, government law  enforcement priorities may be affected since more resources are devoted  to combating these networks. Researchers have identified economic  incentives that have contributed to the increase in counterfeiting and  piracy in recent years. Economic incentives include low barriers to  entering the counterfeiting and piracy business, potentially high profits,  and limited legal sanctions if caught.
The federal government also incurs costs to store and destroy counterfeit  and pirated goods. Seized goods have to be secured, as they have potential  value but cannot be allowed to enter U.S. commerce. Storage may be  prolonged by law enforcement actions, but the goods are generally  destroyed or otherwise disposed of when they are determined to be illegal  and are no longer needed. According to CBP officials, as seizures have  increased, the agency’s storage and destruction costs have grown and  become increasingly burdensome. CBP reported that it spent about $41.9  million to destroy seized property between fiscal years 2007 and 2009.
Counterfeits also pose a threat to the reliability of supply chains that have  national security or civilian safety significance. According to a recent  Commerce report, counterfeit electronics parts have infiltrated U.S.  defense and industrial supply chains and almost 40 percent of companies  and organizations—including the Department of Defense—surveyed for  the report have encountered counterfeit electronics. Commerce reported  that the infiltration of counterfeit parts into the supply chain was  exacerbated by weaknesses in inventory management, procurement  procedures, and inspection protocols, among other factors. The Federal  Aviation Administration (FAA) tracks and posts notifications of incidents  of counterfeit or improperly maintained parts entering airline industry  supply chains through its Suspected Unapproved Parts Program in an  effort to improve flight safety. The FAA program has identified instances  of counterfeit aviation parts, as well as fake data plates and history cards  to make old parts look new. FAA’s program highlights the risks that  counterfeit parts pose to the safety of commercial aircraft.
section_title: The U.S. Economy May Experience Slower Growth
paragraphs: The U.S. economy as a whole may grow at a slower pace than it otherwise  would because of counterfeiting and piracy’s effect on U.S. industries,  government, and consumers. According to officials we interviewed and  OECD’s 2008 study, to the extent that companies experience a loss of  revenues or incentives to invest in research and development for new  products, slower economic growth could occur. IP-related industries play  an important role in the growth of the U.S. economy and contribute a  significant percentage to the U.S. gross domestic product. IP-related  industries also pay significantly higher wages than other industries and  contribute to a higher standard of living in the United States. To the extent  that counterfeiting and piracy reduce investments in research and  development, these companies may hire fewer workers and may  contribute less to U.S. economic growth, overall. The U.S. economy may  also experience slower growth due to a decline in trade with countries  where widespread counterfeiting hinders the activities of U.S. companies  operating overseas.
In addition to the industry effects, the U.S. economy, as a whole, also may  experience effects of losses by consumers and government. An economy’s  gross domestic product could be measured as either the total expenditures  by households (consumers), or as the total wages paid by the private  sector (industry). Hence, the effect of counterfeiting and piracy on  industry would affect consumers by reducing their wages, which could  reduce consumption of goods and services and the gross domestic  product. Finally, the government is also affected by the reduction of  economic activity, since fewer taxes are collected.
section_title: Certain Stakeholders May Experience Positive Economic Effects of Counterfeiting and Piracy
paragraphs: Some experts we interviewed and literature we reviewed identified  potential positive economic effects of counterfeiting and piracy. Some  consumers may knowingly purchase a counterfeit or pirated product  because it is less expensive than the genuine good or because the genuine  good is unavailable, and they may experience positive effects from such  purchases. For example, consumers in the United States and other  countries purchase counterfeit copies of high-priced luxury-branded  fashion goods at low prices, although the products’ packaging and sales  venues make it apparent they are not genuine. Consumers may purchase  movies that have yet to be released in theaters and are unavailable in  legitimate form. Lower-priced counterfeit goods may exert competitive  pressure to lower prices for legitimate goods, which may benefit  consumers. However, according to the OECD, the longer-term impact for  consumers of falling prices for legitimate goods is unclear, as these  changes may affect the speed of innovation.
There are also certain instances when IP rights holders in some industries  might experience potentially positive effects from the knowing  consumption of pirated or counterfeit goods. For example, consumers  may use pirated goods to “sample” music, movies, software, or electronic  games before purchasing legitimate copies, which may lead to increased  sales of legitimate goods. In addition, industries with products that are  characterized by large “switching costs,” may also benefit from piracy due  to lock-in effects. For example, some experts we spoke with and literature  we reviewed discussed how consumers after being introduced to the  pirated version might get locked into new legitimate software because of  large switching costs, such as a steep learning curve, reluctance to switch  to new products, and search costs incurred by consumers to identify a  new product to use.
Some authors have argued that companies that experience revenue losses  in one line of business—such as movies—may also increase revenues in  related or complementary businesses due to increased brand awareness.  For instance, companies may experience increased revenues due to the  sales of merchandise that are based on movie characters whose popularity  is enhanced by sales of pirated movies. One expert also observed that  some industries may experience an increase in demand for their products  because of piracy in other industries. This expert identified Internet  infrastructure manufacturers (e.g., companies that make routers) as  possible beneficiaries of digital piracy, because of the bandwidth demands  related to the transfer of pirated digital content. While competitive  pressure to keep one step ahead of counterfeiters may spur innovation in  some cases, some of this innovation may be oriented toward  anticounterfeiting and antipiracy efforts, rather than enhancing the  product for consumers.
section_title: Lack of Data Hinders Efforts to Quantify Impacts of Counterfeiting and Piracy
paragraphs: According to experts we spoke with and literature we reviewed,  estimating the economic impact of IP infringements is extremely difficult,  and assumptions must be used due to the absence of data. Assumptions,  such as the rate at which consumers would substitute counterfeit goods  for legitimate products, can have enormous impacts on the resulting  estimates and heighten the importance of transparency. Because of the  significant differences in types of counterfeit and pirated goods and  industries involved, no single method can be used to develop estimates,  and each method has limitations. Nonetheless, research in specific  industries suggest that the problem is sizeable. Most experts we spoke  with and the literature we reviewed observed that despite significant  efforts, it is difficult, if not impossible, to quantify the net effect of  counterfeiting and piracy on the economy as a whole.
subsections: section_title: Lack of Data Is the Primary Challenge for Quantifying Economic Impacts of Counterfeiting and Piracy
paragraphs: Quantifying the economic impact of counterfeit and pirated goods on the  U.S. economy is challenging primarily because of the lack of available data  on the extent and value of counterfeit trade. Counterfeiting and piracy are  illicit activities, which makes data on them inherently difficult to obtain. In  discussing their own effort to develop a global estimate on the scale of  counterfeit trade, OECD officials told us that obtaining reliable data is the  most important and difficult part of any attempt to quantify the economic  impact of counterfeiting and piracy. OECD’s 2008 report, The Economic  Impact of Counterfeiting and Piracy, further states that available  information on the scope and magnitude of counterfeiting and piracy  provides only a crude indication of how widespread they may be, and that  neither governments nor industry were able to provide solid assessments  of their respective situations. The report stated that one of the key  problems is that data have not been systematically collected or evaluated  and, in many cases, assessments “rely excessively on fragmentary and  anecdotal information; where data are lacking, unsubstantiated opinions  are often treated as facts.”
In cases in which data on counterfeits are collected by federal agencies,  such as CBP or FAA, it is difficult to know how complete the data are. For  example, it is difficult to determine whether CBP’s annual seizure data in  table 1 reflect the extent and types of counterfeits entering the United  States in any given year, the counterfeit products that were detected, or  the level of federal border enforcement effort expended. FAA’s  notifications on counterfeit parts through its Suspect Unapproved Parts  Program rely, in part, on reported incidents or complaints from members  of the aviation community.
Commerce and FBI officials told us they rely on industry statistics on  counterfeit and pirated goods and do not conduct any original data  gathering to assess the economic impact of counterfeit and pirated goods  on the U.S. economy or domestic industries. However, according to  experts and government officials, industry associations do not always  disclose their proprietary data sources and methods, making it difficult to  verify their estimates. Industries collect this information to address  counterfeiting problems associated with their products and may be  reluctant to discuss instances of counterfeiting because consumers might  lose confidence. OECD officials, for example, told us that one reason some  industry representatives were hesitant to participate in their study was  that they did not want information to be widely released about the scale of  the counterfeiting problem in their sectors.
section_title: Assumptions Are Used to Compensate for the Lack of Data
paragraphs: Because of the lack of data on illicit trade, methods for calculating  estimates of economic losses must involve certain assumptions, and the  resulting economic loss estimates are highly sensitive to the assumptions  used. Two experts told us that the selection and weighting of these  assumptions and variables are critical to the results of counterfeit  estimates, and the assumptions should, therefore, be identified and  evaluated. Transparency in how these estimates are developed is essential  for assessing the usefulness of an estimate. Two key assumptions that  typically are required in calculating a loss estimate from counterfeit goods  include the substitution rate used by consumers and the value of  counterfeit goods.
Substitution rate. The assumed rate at which a consumer is willing to  switch from purchasing a fake good to the genuine product is a key  assumption that can have a critical impact on the results of an economic  loss estimate. For example, if a consumer pays the full retail price for a  fake movie thinking that it is the genuine good, an assumption can be  made that a legitimate copy would have been bought in the absence of the  fake product, representing a one-to-one substitution rate. However, this  one-to-one substitution rate requires three important conditions: (1) the  fake good is almost identical in quality to the genuine one; (2) the  consumer is paying full retail price for the fake product; and (3) the  consumer is not aware he is purchasing a counterfeit product. When some  of these conditions are not met (e.g., the consumer paid a significantly  lower price for the counterfeit), the likelihood that the consumer would  have purchased the genuine product at full price is not clear. Substitution  rates also vary by industry, since factors such as product quality,  distribution channels, and information available about the product can  differ significantly.
Value of fake goods. Valuation of the fake goods constitutes another set of  assumptions that has a significant impact. There are several measures of  value that can be used, such as the production cost, the domestic value, or  the manufacturer’s suggested retail price. For example, CBP announced in  a January 2010 press release that it had seized 252,968 DVDs with  counterfeit trademarks. The agency reported that the manufacturer’s  suggested retail price of the shipment was estimated to be more than $7.1  million and the domestic value was estimated at $204,904. Officials from  the International Trade Commission stated that counterfeits are very  difficult to price and estimates of economic impact would benefit from  including a range of prices, from the spot price of the fake on the street  corner at the bottom to the manufacturer’s suggested retail price at the  top.
The level or extent of deception that consumers face is also an important  factor to consider when developing assumptions for the substitution rate  and value of the fake goods. If a consumer is completely deceived, it could  be reasonable to assume a one-to-one substitution rate (i.e., the purchase  of a legitimate good in lieu of the counterfeit one) and a full retail price  (i.e., the manufacturer’s suggested retail sales price). Price, packaging, and  location of the transaction are the most important signs to the consumer  indicating the legitimacy of a good. Many of the experts we interviewed  said that a one-to-one substitution rate is not likely to exist in most  circumstances where counterfeit goods are significantly cheaper than the  legitimate goods. Some experts also noted that the level of consumer  deception varies across industries. For example, consumers who purchase  counterfeit pharmaceuticals are more likely to be deceived, particularly  when the counterfeit good is sold through the same distribution channel as  the genuine product. Some experts observed that few, if any, consumers  would willingly purchase a pharmaceutical product they knew might be  counterfeit. However, the extent of deception among consumers of  audiovisual products is likely lower because sales venues for counterfeit  audiovisual goods tend to be separate from the legitimate ones. Unless the  assumptions about substitution rates and valuations of counterfeit goods  are transparently explained, experts observed that it is difficult, if not  impossible, to assess the reasonableness of the resulting estimate.
section_title: Three Widely Cited Estimates Sourced to U.S. Agencies Cannot Be Substantiated
paragraphs: Three commonly cited estimates of U.S. industry losses due to  counterfeiting have been sourced to U.S. agencies, but cannot be  substantiated or traced back to an underlying data source or methodology.  First, a number of industry, media, and government publications have  cited an FBI estimate that U.S. businesses lose $200-$250 billion to  counterfeiting on an annual basis. This estimate was contained in a 2002  FBI press release, but FBI officials told us that it has no record of source  data or methodology for generating the estimate and that it cannot be  corroborated. Second, a 2002 CBP press release contained an estimate that  U.S. businesses and industries lose $200 billion a year in revenue and  750,000 jobs due to counterfeits of merchandise. However, a CBP official  stated that these figures are of uncertain origin, have been discredited, and  are no longer used by CBP. A March 2009 CBP internal memo was  circulated to inform staff not to use the figures. However, another entity  within DHS continues to use them. Third, the Motor and Equipment  Manufacturers Association reported an estimate that the U.S. automotive  parts industry has lost $3 billion in sales due to counterfeit goods and  attributed the figure to the Federal Trade Commission (FTC). The OECD  has also referenced this estimate in its report on counterfeiting and piracy,  citing the association report that is sourced to the FTC. However, when we  contacted FTC officials to substantiate the estimate, they were unable to  locate any record or source of this estimate within its reports or archives,  and officials could not recall the agency ever developing or using this  estimate. These estimates attributed to FBI, CBP, and FTC continue to be  referenced by various industry and government sources as evidence of the  significance of the counterfeiting and piracy problem to the U.S. economy.
section_title: No Single Approach for Quantifying Impacts of Counterfeiting and Piracy Can Be Used, but Different Studies Indicate Problem Is Sizeable
paragraphs: There is no single methodology to collect and analyze data that can be  applied across industries to estimate the effects of counterfeiting and  piracy on the U.S. economy or industry sectors. The nature of data  collection, the substitution rate, value of goods, and level of deception are  not the same across industries. Due to these challenges and the lack of  data, researchers have developed different methodologies. In addition,  some experts we interviewed noted the methodological and data  challenges they face when the nature of the problem has changed  substantially over time. Some commented that they have not updated  earlier estimates or were required to change methodologies for these  reasons. Nonetheless, the studies and experts we spoke with suggested  that counterfeiting and piracy is a sizeable problem, which affects  consumer behavior and firms’ incentives to innovate. The most commonly  used methods to collect and analyze data, based on our literature review  and interviews with experts, are presented below.
subsections: section_title: Extrapolation of Enforcement Seizure Data
paragraphs: Seizure data from CBP is one of the few types of hard data sources  available and is often used to extrapolate the level of counterfeit and  pirated trade. This approach provides hard evidence of the minimum  quantity of counterfeit goods, but a major limitation is that levels of border  enforcement efforts can vary. For example, in our study of seizures made  by the CBP field offices, we calculated “seizure rates” for the top 25 U.S.  ports, based on the dollar value of IP seizures at each port compared to  the dollar value of IP-related imports there. These ports accounted for  over 75 percent of the value of all IP-related imports into the United States  in fiscal year 2005. We found that the top 3 ports seized over 100 times  more IP counterfeits than the lowest 5 of these ports per dollar of IP- related imports. As a result, it appears that the importance of IP  enforcement and the skill of the personnel at the ports have significant  impact on the level of seizures. This suggests that seizure data might be  useful as a floor, but are not indicative of the actual level of U.S. imports of  counterfeit goods.
A study conducted by the Los Angeles County Economic Development  Corporation, A False Bargain: The Los Angeles County Economic  Consequences of Counterfeit Products, used extrapolation of seizure  data as one of its three approaches to estimate the economic impact of  counterfeits.The authors noted that the key variable in extrapolating  seizure data from CBP was to determine CBP’s success rate in interdicting  illegal goods, which they acknowledged was “unknowable.” One of the  study’s estimates that used CBP seizures to extrapolate the value of  counterfeit and pirated goods in Los Angeles County calculated a range  between $1 billion and $4.6 billion in 2005. This range was based on  different assumptions used for seizure rates and other variables.
Another challenge when extrapolating seizure data is determining the  dollar value to assign to the seized good, which can have a significant  impact on the magnitude of the estimates. For example, in 2009, CBP  seized a shipment of counterfeit sunglasses from China and reported an  estimated total domestic value at $12,146 and a manufacturer’s suggested  retail price at $7.9 million.
section_title: Surveys of Supply and Demand
paragraphs: Researchers have conducted surveys to gather data on the consumption or  sales patterns of counterfeit or pirated goods. The main advantage of this  method is that it can also show consumers’ behavior in terms of their  preferences. For example, a survey could collect information on the  consumer’s willingness to pay for a counterfeit good; the number of  counterfeit units purchased in a determined period of time; the minimum  expected quality; the necessary price reduction of the legitimate good to  avoid the consumer’s purchase of the counterfeit good; the knowledge of  sanctions if caught purchasing the counterfeit good; and the knowledge of  potential “side effects” due to the purchase of fake goods. However, a  survey can be a labor-intensive project and can cost in the millions of  dollars. Moreover, one expert stated that the bias in surveys is hard to  identify. For example, he commented that students, who are often the  subjects in surveys of illegal file sharing, may either not admit that they are  engaging in illegal activity, or may admit to such behavior because it may  be popular for this demographic.
The Business Software Alliance publishes piracy estimates based on a set  of annual surveys it conducts in different countries. Based on its survey  results, the industry association estimated the U.S. piracy rate at 20  percent for business software, carrying a loss of $9 billion in 2008. This  study defined piracy as the difference between total installed software and  legitimate software sold, and its scope involved only packaged physical  software. While this study has an enviable data set on industries and  consumers located around the world from its country surveys, it uses  assumptions that have raised concerns among experts we interviewed,  including the assumption of a one-to-one rate of substitution and questions  on how the results from the surveyed countries are extrapolated to  nonsurveyed countries.
Another example of the use of surveys is the study by the Motion Picture  Association, which relied on a consumer survey conducted in several  countries. This study found that U.S. motion picture studios lost $6.1  billion to piracy in 2005. It is difficult, based on the information provided  in the study, to determine how the authors handled key assumptions such  as substitution rates and extrapolation from the survey sample to the  broader population.
In a smaller-scale example of a survey method, Rob and Waldfogel  surveyed students in American universities during parts of 2003 and 2004,  asking not only about the amount of music albums they purchased and  illegally downloaded, but also the titles and their valuation for the albums  they purchased and illegally downloaded. Their main findings are: (1)  downloading reduces legitimate purchases by individuals by 20 percent in  the sample, that is, every five music downloads substitute one legitimate  purchase; (2) on average, respondents downloaded music that they valued  one-third to one-half less than their legitimately purchased music,  suggesting that some of the music that was downloaded would never have  been purchased as an album; and (3) while downloading reduces per  capita expenditures by $25, it raises per capita consumers’ surplus by $70.  The study indicated that downloading illegal music can have a positive  effect on total consumer welfare. However, as explained by the authors,  this experiment cannot be generalized; the data consist of a snapshot of  undergraduate students’ responses, which is not representative of the  general population.
As previously discussed, Commerce recently conducted a survey of 387  companies and organizations participating in U.S. defense and industrial  supply chains and reported that almost 40 percent of them encountered  counterfeit products between 2005 and 2008. The report focused on basic  electronic parts and components, including microcircuits and circuit  boards, throughout the entire electronics industrial base in the United  States. The report noted that these parts are key elements of electronic  systems that support national security missions and control essential  commercial and industrial operations. Information provided by these  companies and organizations also demonstrated an increase in the number  of reported counterfeit incidents from 3,868 in 2005 to 9,356 in 2008. Some  of these counterfeit incidents could include DOD-qualified parts and  components.
section_title: Use of Economic Multipliers to Estimate Effects on the U.S. Economy
paragraphs: Economic multipliers show how capital changes in one industry affect  output and employment of associated industries. Commerce’s Bureau of  Economic Analysis guidelines make regional multipliers available through  its Regional Input-Output Modeling System (RIMS II). These multipliers  estimate the extent to which a one-time or sustained change in economic  activity will be attributed to specific industries in a region. Multipliers  can provide an illustration of the possible “induced” effects from a one- time change in final demand. For example, if a new facility is to be created  with a determined investment amount, one can estimate how many new  jobs can be created, as well as the benefit to the region in terms of output  (e.g., extra construction, manufacturing, supplies, and other products  needed). It must be noted that RIMS II multipliers assume no job  immigration or substitution effect. That is, if new jobs are created as a  result of investing more capital, those jobs would not be filled by the labor  force from another industry.
In the case of estimating the effect of counterfeiting and piracy, RIMS II  economic multipliers are applied to U.S. industry loss figures, which have  been derived from other studies, and used to calculate the harm on  employment and output due to reduced investments. Using the RIMS II  multipliers in this setting does not take into account the two-fold effect:  (1) in the case that the counterfeit good has similar quality to the original,  consumers have extra disposable income from purchasing a less  expensive good, and (2) the extra disposable income goes back to the U.S.  economy, as consumers can spend it on other goods and services.
Most of the experts we interviewed were reluctant to use economic  multipliers to calculate losses from counterfeiting because this  methodology was developed to look at a one-time change in output and  employment. Nonetheless, the use of this methodology corroborates that  the effect of counterfeiting and piracy goes beyond the infringed industry.  For example, when pirated movies are sold, it damages not only the  motion picture industry, but all other industries linked to those sales.
The Institute of Policy Innovation has commissioned three studies in the  audiovisual industries using economic multipliers; the most expansive of  the studies covers motion pictures, sound recordings, business and  entertainment software, and video games for the year 2005. This study  found that losses in the U.S. economy due to piracy accounted for $58  billion in output, over 370,000 jobs, and $2.6 billion in tax revenue. It was  calculated by taking industry estimates of loss revenue and applying the  RIMS II multipliers to these figures.
section_title: Other Data Collection and Modeling Methods
paragraphs: Several additional studies that we reviewed provided alternative data  collection and modeling techniques to quantify the effect of counterfeiting  on a specific industry or, in the case of the OECD, on world trade. The  OECD, for example, adopted an approach of combining different  methodologies to develop a single estimate. The OECD triangulated a  combination of data sets: extrapolating seizure data provided by national  customs authorities, comparing the seizure data to international trade  data, and using these data in an econometric model. The seizure data were  used to develop a model that would measure the magnitude of global  counterfeit trade.
The OECD estimated that the magnitude of counterfeit and pirated goods  in international trade could have accounted for up to $200 billion in 2005,  and later updated this estimate to $250 billion based on 2005-2007 world  trade data.26, 27 As noted by the OECD, most of the international trade data  were supplied by national governments and relevant industries, and the  OECD did not independently assess the reliability of the figures. Its  methodology is based on matching, to the best of its knowledge, the  industry data with customs seizure data from the OECD members,  acknowledging the limitations of working with customs seizure data.  OECD heavily qualified this estimate, however, reporting that “the overall  degree to which products are being counterfeited and pirated is unknown  and there do not appear to be any methodologies that could be employed  to develop an acceptable overall estimate.” A second phase of the OECD  project covered digital piracy, but did not attempt to quantify the effects.
The OECD estimate was limited to internationally traded hard goods and did not include  digital piracy or counterfeit goods produced and consumed within the same country.
OECD, Magnitude of Counterfeiting and Piracy of Tangible Products: An Update, Paris:  OECD, November 2009.
In a more narrowly focused study on downloads of music, Oberholzer-Gee  and Strumpf used modeling to determine that illegal downloads have no  effect on record sales. They concluded that, in contrast with industry  estimates, declining sales over the period of 2000-2002 were not primarily  caused by illegal downloads. The results were found after compiling a data  set of illegal downloads from a prominent server and testing the variation  between illegal downloads and legal sales in the United States of specific  albums on a weekly basis for 17 weeks in the second half of 2002. This was  done by modeling album sales as a function of the quantity of album  downloads and other album specific characteristics. While this is an  enviable data set of actual illegal downloads, the study has two main  limitations: first, the study uses a static model which does not reflect the  effect of downloads apart from the week the download occured. Second,  the study only observed the supply side of music. Thus, it is not clear if  consumers who are illegally downloading music would have purchased the  genuine albums.
Hui and Png’s study provided another example that used modeling. This  study estimated that piracy in the music industry caused revenue losses of  6.6 percent in 1998. The authors stated that their estimate is significantly  less than the industry loss estimate. In particular, for the year 1998 in the  United States, legitimate sales of CDs were 3.73 CDs per capita, and the  average loss in sales per capita due to piracy was 0.044 CDs. The data set  included CD prices, music CD demand, piracy level and country-specific  characteristics for 28 countries, mostly provided by the International  Federation of the Phonographic Industry. The main limitation for this  study was that it only covered physical piracy. While digital piracy was not  a major concern during the time period sampled, it has become so for at  least the last decade due to the Internet. Another limitation is that the  study used piracy rates that assumed a one-to-one substitution rate,  including those used by the Business Software Alliance.
Many experts we interviewed also agreed that general or partial  equilibrium models would offer useful insights if the input data existed.  These involve modeling the supply and demand of a good and simulating  the effect of how counterfeiting affects the market for that good (in the  case of a partial model) and the economy as a whole (for a general  equilibrium model). The approach allows a systematic analysis of the  problem, but depends on the quality of the data used to develop the  models. The benefit of an equilibrium model is that assumptions can be  tested based on the results obtained and modified if the results fall outside  of established parameters. Experts agreed on the potential benefits of this  approach, but recognized that data limitations make it currently close to  impossible to implement. Officials from the International Trade  Commission and other industry experts said that this would be their  preferred approach to think of the problem in question, but they also  acknowledged that data reliability is a major concern, as with the other  methodologies.
section_title: “Rule of Thumb” for Measuring Counterfeit Trade as a Proportion of World Trade
paragraphs: According to experts we interviewed and the literature we reviewed, there  is no evidence to support a “rule of thumb” that measures counterfeit trade  as a proportion of world trade to estimate the amount of counterfeit trade  that occurs in a local economy. The advantage of finding a so-called “rule  of thumb” for counterfeit trade is that it can be applied generally and does  not try to take into consideration the different rates of counterfeiting and  piracy for each of the different industry sectors. However, as noted earlier,  piracy rates differ enormously across industries, so it is not possible to  generalize findings. Moreover, not all goods from world trade can be  counterfeited or pirated.
The most commonly cited “rule of thumb” is that counterfeit trade  accounts for 5 to 7 percent of world trade, which has been attributed to  the International Chamber of Commerce. The Office of the Comptroller of  the City of New York used this rule of thumb in its 2004 study to estimate  the total dollar exchange of counterfeit goods in the United States and in  New York State. This study first applied a 6 percent rule (an average of 5  to 7 percent “rule of thumb”) to the total value of world trade in 2003 ($7.6  trillion) to calculate the value of world trade that is made up of counterfeit  goods, arriving at $456 billion.
This rule of thumb was widely spread by a 1998 OECD report, although  OECD and experts cautioned that this estimate was not verifiable and the  source data were not independently calculated. In its 2008 report, The  Economic Impact of Counterfeiting and Piracy, the OECD commented  that the “metrics underlying the International Chamber of Commerce’s  estimates are not clear,” nor is it clear what types of IP infringements are  included in the estimate. In a 2009 update to the report, the OECD  estimated the share of counterfeit and pirated goods in world trade as 1.95  percent in 2007, increasing from 1.85 percent in 2000. Many of the experts  we interviewed also expressed skepticism over the estimate that  counterfeit trade represents 5 to 7 percent of world trade.
section_title: Economy-Wide Impact of Counterfeiting and Piracy Is Unknown
paragraphs: While experts and literature we reviewed provided different examples of  effects on the U.S. economy, most observed that despite significant efforts,  it is difficult, if not impossible, to quantify the net effect of counterfeiting  and piracy on the economy as a whole. For example, as previously  discussed, OECD attempted to develop an estimate of the economic  impact of counterfeiting and concluded that an acceptable overall estimate  of counterfeit goods could not be developed. OECD further stated that  information that can be obtained, such as data on enforcement and  information developed through surveys, “has significant limitations,  however, and falls far short of what is needed to develop a robust overall  estimate.” One expert characterized the attempt to quantify the overall  economic impact of counterfeiting as “fruitless,” while another stated that  any estimate is highly suspect since this is covert trade and the numbers  are all “guesstimates.”
To determine the net effect, any positive effects of counterfeiting and  piracy on the economy should be considered, as well as the negative  effects. Experts held different views on the nature of potentially offsetting  effects. While one expert we interviewed stated that he did not believe  there were any positive effects on the economy due to counterfeiting and  piracy, other experts stated that there were positive effects and they  should be assessed as well. Few studies have been conducted on positive  effects, and little is known about their impact on the economy. Although  some literature and experts suggest that negative effects may be  overstated, in general, literature and experts indicate the negative effects  of counterfeiting and piracy on the U.S. economy outweigh the positive  effects. Since there is an absence of data concerning these potential  effects, the net effect cannot be determined with any certainty.
The experts we interviewed also differed regarding the extent to which net  effects of counterfeiting and piracy could be measured in certain parts of  the economy. For example, one expert we spoke with has conducted  research that found that employment numbers may be lost to the U.S.  economy when copyright industries lose business due to piracy. Other  experts we interviewed stated that, in their view, employment effects are  unclear, because employment may decline in certain industries or rise in  other industries as workers are hired to produce counterfeits. Another  expert told us that effects of piracy within the United States are mainly  redistributions within the economy for other purposes and that they  should not be considered as a loss to the overall economy. He stated that  “the money does not just vanish; it is used for other purposes.” Other  experts we spoke with focused more on the difficulties of aggregating the  wide variety of effects on industries into a single assessment.
We are sending copies of this report to interested congressional  committees; the Secretaries of Commerce, Health and Human Services,  and Homeland Security; the Attorney General; the Chairman of the  International Trade Commission; the U.S. Trade Representative, and the  Intellectual Property Enforcement Coordinator. This report will also be  available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-4347 or yagerl@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Prioritizing Resources and Organization for Intellectual Property Act  of 2008 (PRO-IP Act) directed GAO to conduct a study on the  quantification of the impacts of imported and domestic counterfeits on the  stry and the overall economy of the United States.  U.S. manufacturing indu  government  After conducting initial research, we determined that the U.S. form analysis on the impacts of  did not systematically collect data and per counterfeiting and piracy on the U.S. economy, and concluded that it was  not feasible to generate our own data or attempt to quantify the economic  impact of counterfeiting or piracy on the U.S. economy based on the  review of existing literature and interviews with experts. In addition, we  noted that many of the existing studies and literature on economic effects  address both counterfeiting and piracy. Based on discussions with staff  from the House and Senate Judiciary Committees, we agreed that we  would (1) examine existing research on the effects of counterfeiting and  piracy on consumers, industries, government, and the U.S. economy; and  (2) identify insights gained from efforts to quantify the effects of  counterfeiting and piracy on the U.S. economy. To address both of these  objectives, we interviewed officials and representatives from industry  associations, nongovernmental organizations, academic institutions, and  U.S. government agencies and the multilateral Organization for Economic  Cooperation and Development (OECD). We also reviewed documents and  studies quantifying or discussing the impacts of counterfeiting and piracy  on the U.S. economy, industry, government, and consumers.
Specifically, we reviewed quantitative and qualitative studies published  since 1999 of the economic impact of intellectual property (IP)  infringements to examine the range of impacts of counterfeiting and piracy  on various stakeholders (both positive and negative) and to identify other  insights about the nature of counterfeit markets, approaches to developing  estimates, and the role IP plays in the U.S. economy. We identified these  reports and studies through a literature search and discussions with  representatives from industry associations, nongovernmental  organizations, academic institutions, U.S. government agencies, and the  OECD to obtain their views on the most relevant studies to review. Our  literature review also included the OECD studies that examined the  economic impact of counterfeiting and piracy. Although the OECD studies  are global in scope rather than focused on the U.S. economy, their unique  nature and prominence as the most comprehensive attempt to quantify the  impacts of counterfeiting and piracy warranted their inclusion within our  scope. See the bibliography for a partial list of references we consulted.  We did not assess or evaluate the accuracy of quantitative estimates or  other data found in these studies. We reviewed the studies primarily to  obtain information on the range of effects from counterfeiting and piracy,  different methods and assumptions used in determining effects, and  insights gained from these efforts. In selecting studies for review, we  sought to include a range of industries and methodologies. In some cases,  we interviewed the authors of these reports to obtain additional  information.
We conducted structured interviews with subject matter experts to obtain  their views on efforts to quantify the economic impacts of counterfeiting  and piracy and methodological approaches, the range of impacts of  counterfeits and piracy, and insights on counterfeiting activities and  markets. We identified experts through a literature review and discussions  with relevant government officials, industry and consumer  representatives, academics, and other stakeholders. These subject ma tter  experts were selected from a population of individuals from government,  academia, industry, and professional organizations. More specifically, our  criteria for selecting experts to interview included:  type and depth of experience, for instance, whether the expert had  authored a widely referenced study or article on the topic, and whether  the expert was referred to us by at least one other interviewee as someone  knowledgeable about the topic; relevance of published work to this engagement; representation of a range of perspectives; representation of relevant organizations and sectors including, where  applicable, representatives from government, academia, industry, and  professional organizations; and other subject matter experts’ recommendations.
We developed a common list of structured interview questions that we  asked of each of the experts. We pretested our questions with two of our initial respondents and refined our questions based on their input. The  structured interviews included questions on definitions of counterfeit and  pirated goods; effects of counterfeiting and piracy; and their views on  methodologies and studies that quantify the effects of counterfeiting and  piracy, as well as assumptions used. Individuals or organizations that we  met with for these structured interviews are listed below:  Business Software Alliance (BSA)
Peggy Chaudhry, Villanova University Joe Karaganis, Social Science Research Council Keith Maskus, University of Colorado  Felix Olberholzer-Gee, Harvard University Stephen Siwek, Economists Inc.
Security, Health and Human Servic Representative, the International Trade Commission, and the Office of the  U.S. Intellectual Property Enforcement Coordinator to obtain technical  comments. We received comments from the Departments of Homeland  Security and Justice, and the Offic Enforcement Coordinator and made changes as appropriate. es, the Office of the U.S. Trade  e of the U.S. Intellectual Property  he PRO-IP Act also directed us to report on the nature and scope of IP  T statutory and case laws and the extent investig with Co our 2008 report, Intellectual Property: Federal E Generally Increased, but Assessing Perform Enforcement Efforts (GAO-08-157).
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgements
paragraphs: In addition to the contact named above, Christine Broderick, Assistant  Director; Jeremy Latimer; Catherine Gelb; Pedro Almoguera; Shirley  Brothwell; Karen Deans; Matthew Jones; and Diahanna Post made key  contributions to this report. In addition Virginia Chanley and Ernie  Jackson provided technical assistance.
section_title: Bibliography
subsections: section_title: Studies and Litera the Nature of Counterfeiting and Piracy and Their Economic Effects
subsections: section_title: Studies and Government Estimates We Reviewed that Quantify Economic Impacts on the U.S. Economy or Industry Sectors
paragraphs: Business Software Alliance (BSA), Sixth Annual BSA-IDC Global  Software 08 Piracy Study, Washington, D.C.: BSA, May 2009.
Customs and Border Protection. Press Release, May 29, 2002,  Washington, D.C.: May 2002  http://www.cbp.gov/xp/cgov/newsroom/news_releases/archives/legacy/200 2/52002/05292002.xml (accessed April 4, 2009).
Federal Bureau of Investigation. Press Release, July 17, 2002, Washington,  D.C.: July 2002 http://www.fbi.gov/pressrel/pressrel02/outreach071702.htm  (accessed March 30, 2010).
Freeman, Gregory, Nancy D. Sidhu, and Michael Montoya, A False  Bargain: The Los Angeles County Economic Consequences of Counterfeit  Products. Los Angeles, Calif.: Los Angeles County Economic Development  Corporation, February 2007.
Hui, Kai-Lung and Ivan Png, “Piracy and the Legitimate Demand for  Recorded Music,” Contributions to Economic Analysis & Policy, vol. 2,  issue 1, article 11 (2003).
International Chamber of Commerce, Counterfeiting Intelligence Bureau,  London: 2010.   http://www.icc-ccs.org/index.php?option=com_content&view=article&id= 29&Ite mid=39 (accessed March 30, 2010).
L.E.K. Consulting, The Cost of Movie Piracy, sponsored by the Motion  Picture Association, 2006.
Motor & Equipment Manufacturers Association (MEMA), Stop  Counterfeiting of Automotive and Truck Parts. MEMA, 2005.
Oberholzer-Gee, Felix and Koleman Strumpf, “The Effect of File Sharing  on Record Sales: An Empirical Analysis,” Journal of Political Economy,  vol. 115, no. 1, 2007.
Organisation for Economic Cooperation and Development (OECD), The  Economic Impact of Counterfeiting and Piracy. Paris: OECD, 2008.
OECD, Magnitude of Counterfeiting and Piracy of Tangible Products: An  Update, Paris: OECD, November 2009.
OECD, Piracy of Digital Content. Paris: OECD, 2009.
April 2006).
Siwek, Stephen E., The True Cost of Copyright Industry Piracy to the  U.S. Economy, Institute for Policy Innovation (IPI), IPI Center for  Technology Freedom, Policy Report 189, (October 2007).
Thompson, William C. Jr., Bootleg Billions: The Impact of the Counterfeit  Goods Trade on New York City, City of New York, Office of the  Comptroller, November 2004.
section_title: Other Literature We Reviewed
paragraphs: Baumol, William J. The Free Market Innovation Machine: Analyzing the  Growth Miracle of Capitalism. Princeton and Oxford: Princeton  University Press, 2002.
Chaudhry, Peggy and Alan Zimmerman, The Economics of Counterfe Trade: Governments, Consumers, Pirates, and Intellectual Property  Rights. Berlin: Springer, 2009.
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