Endogenous market structures, product liability, and the scope of product differentiation

Eric Langlais and Andreea Cosnita-Langlais

No 2022-18, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: The paper considers how product liability may shape firm size, product specification choices and market structure. We introduce a spatial Cournot duopoly on the linear market, where firms make an initial decision of product differentiation, then invest in precaution, before competing in quantity. Our main results are fourfold; 1) with full coverage of the market by the duopoly, there exist two equilibria (in pure strategies): central agglomeration (which is stable for low liability costs), and dispersion (which is stable for not too large liabiliy costs); 2) for larger liability costs, a mixed market structure duopoly/monopoly sustains a unique equilibrium with product differentiation; 3) this equilibrium enables a scope of differentiation higher (smaller) than the full duopoly (the social optimum); 4) the impact of liability costs on firms size and profits is complex, since it depends on the impact on both product differentiation and market structure. Finally, we show that consumer surplus and social welfare are both higher under the mixed market structure than under the full duopoly in an equilibrium with product differentiation.

Keywords: horizontal differentiation; Cournot competition; spatial model; endogenous market structures; product liability; strict liability; negligence (search for similar items in EconPapers)
JEL-codes: D82 K21 L41 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2022
New Economics Papers: this item is included in nep-bec, nep-com, nep-gth, nep-ind, nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Endogenous market structures, product liability, and the scope of product differentiation (2022)
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