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

33 Pages Posted: 29 Jul 2013 Last revised: 18 Nov 2013

Andrzej Baniak

Central European University (CEU) - Department of Economics

Peter Grajzl

Washington and Lee University - Department of Economics; CESifo

A. Joseph Guse

Washington and Lee University - Williams School of Commerce, Economics, and Politics

Date Written: November 18, 2013

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.

Keywords: products liability, industry reputation, oligopoly, industry size, competition policy

JEL Classification: K13, L13, D43

Suggested Citation

Baniak, Andrzej and Grajzl, Peter and Guse, A. Joseph, Producer Liability and Competition Policy When Firms are Bound by a Common Industry Reputation (November 18, 2013). Available at SSRN: https://ssrn.com/abstract=2300971 or http://dx.doi.org/10.2139/ssrn.2300971

Andrzej Baniak

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary
(36) 1 327-3231 (Phone)
(36) 1 327-3232 (Fax)

Peter Grajzl (Contact Author)

Washington and Lee University - Department of Economics ( email )

Lexington, VA 24450
United States

HOME PAGE: http://home.wlu.edu/~grajzlp/

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

A. Joseph Guse

Washington and Lee University - Williams School of Commerce, Economics, and Politics ( email )

Lexington, VA 24450
United States

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