Competition, product safety, and product liability
Yongmin Chen () and
MPRA Paper from University Library of Munich, Germany
A firm's incentive to invest in product safety is affected by both the market environment and the liability when its product causes consumer harm. A long-standing question in law and economics is whether competition can (partially) substitute for product liability in motivating firms to improve product safety. We investigate this issue in a spatial model of oligopoly with product differentiation, where reputation provides a market incentive for product safety and higher product liability may distort consumers' incentive for proper product care. We find that partial liability, together with reputation concerns, can motivate firms to make socially desirable safety investment. Increased competition due to less product differentiation lowers equilibrium market price, which diminishes a firm's gain from maintaining reputation and raises the socially desirable product liability. On the other hand, an increase in the number of competitors reduces both the benefit from maintaining reputation and the potential cost savings from cutting back safety investment; consequently, the optimal liability may vary non-monotonically with the number of competitors in the market. In general, therefore, the relationship between competition and product liability is subtle, depending on how competition is measured.
Keywords: product safety; product liabilty; competition (search for similar items in EconPapers)
JEL-codes: K13 L13 L15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind, nep-law, nep-mic and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/66450/1/MPRA_paper_66450.pdf original version (application/pdf)
Journal Article: Competition, Product Safety, and Product Liability (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:66450
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().