Platform Liability Rules: Strict Liability versus Negligence

Abstract

This paper explores whether platform liability should be strict or negligence based. Platforms get revenue by selling products or services to consumers and selling advertising or information to others. There are indirect network effects: higher consumer participation generates more revenue from advertising or data sales but also magnifies the social harm. Both strict liability and negligence motivate platforms to take socially efficient precautions to reduce risks of harm, but they have different impacts on consumer participation. If network benefits are weak (strong), the price charged to consumers is positive (zero). If the price is positive, negligence stimulates more (the same) consumer participation than strict liability when victims are bystanders (consumers). If the price is zero, strict liability stimulates more (the same) consumer participation than negligence when victims are consumers (bystanders). When network benefits are large, the standard results from the literature are reversed. 

Keywords: platforms, liability, products liability, negligence, digital markets, competition

JEL Classification: K13, K42, L12, L15, L22