Should Platforms be Held Liable for Defective Third-Party Goods?

Abstract

This paper develops a model of platform liability for ex-post compensation of consumer harm caused by third-party sellers. A platform chooses how liability is shared with sellers, but assumes no liability because it reduces sellers' safety investments. Mandated platform liability can increase or decrease consumer surplus: it is more likely to be beneficial when the platform has weak market power or faces competition, but less so when it sells first-party goods or third-party sellers are judgment-proof. When the platform invests in screening judgment-proof sellers, liability regulation encourages investment, increasing welfare gains. Regulations targeting only incumbents may deter platform entry.

Keywords: platform liability, ex-post compensation, marketplace, platform regulation

JEL Classification: L1, L4, K13