convergence

Picard
The Government Accountability Office reviewed the current knowledge on the economic
effects of counterfeiting and piracy. It concluded that three widely cited U.S. Government
estimates of economic losses resulting from counterfeiting could not be substantiated due to
the absence of underlying studies and highlighted the difficulties of coming up with reliable
estimates on the global extent and impact of counterfeiting. The GAO review concluded that
no single approach for quantifying impacts of counterfeiting and piracy can be used.
As early as 2002, a report for the European Commission had already established that
“although many existing estimates of the size of the counterfeiting and piracy problems are
based on extrapolating from the number of seizures, arrests or convictions made by enforcement
agencies, we do not recommend this approach except in rare circumstances.” The only
exceptions are when the detection rate is known to be high (over 75 percent) or can be known
with confidence. In practice, those conditions are virtually never met. This same report develops
a detailed methodology to estimate counterfeiting for each of 19 different industries, including
an estimate of the costs. Unfortunately, there was no followup to the report.
The fundamental difficulty with estimating counterfeiting is that the brand owners are best
positioned to know the significance and prevalence of the issue, or how to differentiate genuine
articles from counterfeits. Generally speaking, however, the industry is unwilling to share the
data it has collected, even though this is harming public health, consumers, and its own longterm
interests. Industry associations, which have an interest in boasting large numbers, publicize
estimates but often without any supporting methodology or access to underlying data.
The Business Software Alliance (BSA) is one of the exceptions, as it publishes a detailed
report annually on software piracy and has developed a methodology to measure the amount of
counterfeit software. The BSA reaches its figure on the amount of unlicensed software by estimating
how much personal computer software was deployed in a given year, estimating how much was
paid for or otherwise legally acquired during the year, and then subtracting one from the other.
The difference between these two quantities corresponds to the commercial value of installed
illicit software, which was valued at $59 billion for 2010. 25 The BSA does not attempt, however,
to relate the official retail value of pirated software to the actual losses of the software industry.
Interestingly, this technique of differentials is somewhat analogous to such methods as
the World Bank Residual Model, which estimate illicit financial flows. The difficulty of performing
direct observation is partly circumvented by measuring two quantities such as supply
and demand that should in principle be equal in the absence of illicit activity. The difference
between these two quantities corresponds to the amount of illicit activity. We could imagine
using this principle to measure illicit activities for which it is hard or costly to make direct
observation, but which can be measured as a difference between an input and an output. For
example, counterfeiting could in some cases be measured as the difference between the legitimate
supply and the total demand (which includes counterfeits) if the two quantities can be
known or approximated, as is the case for the amount of deployed software.
Excised Goods
While the illicit trade in cigarettes is the most studied black market for the purpose of excise
tax avoidance, it is likely that other illicit markets in excisable goods amount to tens of billions
more. Illicit trade in tobacco creates a black market that is or can be relatively accurately
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