A few years ago I was reading a pirated copy of “The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor–and Why You Can Never Buy a Decent Used Car!,” that I had picked up at the book stall next to a large university. In the book I found an interesting discussion of used cars, and only months later realized that this is the exact same problem we are facing in China with pirated goods.
Let’s start with an obvious example of this principle.
Imagine you are walking down the streets of Shanghai, and you want to buy a real Rolex. The first place you visit is an actual Rolex shop, and since it is in the middle of an upscale shopping center, you know it is a real Rolex store, not some kind of elaborate trap. In this place a Rolex watch costs $2,000. Are you sure it is a genuine Rolex? Of course you are, so if you had $2,000 in your watch fund, you would buy this watch without much worry.
Now imagine if right before you walked into the Rolex shop a man carrying a large brief case and wearing dark sunglasses motioned for you to come into the alleyway. He opens his case and shows you a wide variety of Rolex watches, and offers to sell you one for $50. You are not an expert in watches, and it seems to look real, but you know from your surroundings that this watch is definitely a fake.
In both of these scenarios it’s very easy to guess whether or not the goods you are buying are genuine, and they allow the market to function smoothly because as the consumer, you know what to expect when you make a purchase.
This third scenario is the one we face every day in China.
You show up to a large shopping mall where a variety of hawkers sell a mixture of genuine and fake goods. Again you see a Rolex that seems real, and the price is hard to beat, only $1,000. The dealer tells you that this watch has a minor scratch on the case so it has to be heavily discounted, but you can’t find anything wrong with it. Now should you assume that the watch is real or fake?
This is information asymmetry, which is a fancy way of saying only the seller knows whether or not this is a good deal. As the customer, if we spend $1,000 on a $2,000 watch we’ve found a heck of a deal, but at the same time it may be a total rip off. As the seller, there is no way they are going to allow themselves to lose money, if the watch was real, it would sell at the much higher price. We have to assume the watch is a fake.
Now expand this idea beyond brands you are familiar with, which is the case for consumers in China. There are hundreds of new companies starting up every day, and there is no way of knowing whether or not their products are any good.
So again looking at watches, at around $100 it’s easy to find a name brand you recognize, or at $5 you can find a cheap watch that doesn’t matter if it only lasts a few months. Anything in between becomes a shot in the dark, and we have to assume that there is always a chance that anything in between is a knockoff that will break in a few days.
This is why with virtually all goods in China there are the “luxury” brands, or the cheap knock off brands, and nothing priced in between. Until China cracks down on piracy and copyrights, the middle class won’t be able to fully enjoy the fruits of their new-found wealth.