Producer Liability and Competition Policy When Firms are Bound by a Common Industry Reputation

Posted by D. Daniel Sokol

Andrzej Baniak, Central European University (CEU) - Department of Economics, Peter Grajzl, Washington and Lee University - Department of Economics and A. Joseph Guse, Washington and Lee University - Williams School of Commerce, Economics, and Politics discuss Producer Liability and Competition Policy When Firms are Bound by a Common Industry Reputation.

ABSTRACT: We contrast the laissez-faire regime with the regime of strict producer liability, and draw the implications for competition policy, in a setting where oligopolistic firms cannot differentiate themselves from rivals but rather are bound by a common industry reputation for product safety. We show that, first, unlike in the traditional products liability model, firms' incentives to invest in precaution depend on market structure. Second, depending on the magnitude of expected damages awarded by the courts, laissez-faire can welfare-dominate strict producer liability. Third, the relationship between social welfare and industry size, and hence the role for competition policy, depends on the institutional regime governing the industry. Under some circumstances, restricting industry size is unambiguously welfare-enhancing.