The paper addresses a trademark infringer who seeks to capitalize on the reputation of a trademark owner, sells an identical product under a trademarkwhich is confusingly similar to that of theowner, charges the same price and competes with him in the same market. We show that the welfare-maximizing monitoring intensity is zero, hence the government is not likely to engage in monitoring infringement. Recognizing this, the trademark ownermay consider monitoring the market himself, discovering, however, that this is worth his while only if the penalty for infringement, which he fully collects, is sufficiently high. Given the entry condition, an increase in the penalty may either raise or lower the optimal monitoring intensity. In the former case it will counter-intuitively increase the infringer’s expectedprofit, apparently because ahigher penaltywill also lead to a raise inprice.Whilemonitoringenables the trademark owner to maintain a positive profit level, it reduces social welfare. The government may intervene to eliminate the private incentive for monitoring through taxing the collected penalty. © 2009 Elsevier Inc. All rights reserved.