Incentives to differentiate under environmental liability laws: Product customization and precautionary effort

Eric Langlais and Andreea Cosnita-Langlais

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Abstract: We endogenize location/product specification choices in a spatial Cournot duopoly on the linear market, when firms' output entails an accidental harm to the environment. Under a strict liability regime, the equilibrium involves no differentiation when the expected harm is low enough. This outcome is suboptimal, and identical to the spatial pattern obtained under a no-liability regime. With larger harm, the equilibrium displays some dispersion/product differentiation, the degree of which is increasing with the level of harm towards the first best locations/product choices. Our results are robusts when allowing for firms' investment in environmental measures. Moreover, we show that vertical/care differentiation occurs whenever horizontal product differentiation arises. Finally, we show that under a negligence rule, firms always comply with the due care level, but the equilibrium involves no differentiation, either horizontal/product or vertical/care.

Keywords: Cournot competition; spatial model; strategic location; product choice; horizontal differentiation; vertical differentitation; environmental liability; strict liability; negligence. (search for similar items in EconPapers)
Date: 2022
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Working Paper: Incentives to differentiate under environmental liability laws: Product customization and precautionary effort (2022)
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