Everyone knows that counterfeiting is bad business for brands – it weakens consumer confidence and brand loyalty, erodes goodwill, and creates liability issues -- but this month online retailer Etsy learned that counterfeiting is also bad business for e-commerce platforms.

A May 11, 2015 report from industry analyst Wedbush downgraded Etsy to "underperform" from "neutral," based on research that suggests that 5% of all items sold on Etsy are potentially counterfeit, or infringe the trademarks or copyrights of third parties. The report stated that up to 2 million items found on the site constitute infringements or counterfeits, and that the number could be higher because the site is a destination for counterfeiters.  

The report caused Etsy's stock price to drop 8% on the day of publication.  Etsy's stock was trading at $22.79 the day before publication, and as of May 20, 2015 the price was down to $17.26.

A comparable drop in stock price was seen after a report levied similar accusations of counterfeiting against Chinese web marketplace Alibiba, causing its shares to decline by over 4% in January.

While it is encouraging to see the market response to e-commerce sites that fail to monitor for counterfeits, brand owners still need to be aware of just how rampant counterfeiting is across e-commerce platforms.