Elsevier

Economics Letters

Volume 173, December 2018, Pages 128-130
Economics Letters

On consumer preferences for (partial) products liability

https://doi.org/10.1016/j.econlet.2018.10.006Get rights and content

Highlights

  • We present a setup in which consumers support products liability.

  • Partial products liability may be preferred by all consumers.

  • Consumer heterogeneity limits the firm’s ability to extract rents.

Abstract

Traditional law and economics analyses of products liability find that different liability regimes lead to the same market outcome, implying that risk-neutral consumers are indifferent between products liability and no products liability. We present a setup in which a group of consumers supports the implementation of products liability although its enforcement is costly. All consumers may prefer the same level of (partial) products liability.

Introduction

Both the size and the scope of the potential liability have increased over the past fifty years (e.g., Rubin, 2005). Potential explanations are an optimal adaptation of the legal system to changing circumstances (e.g., Landes and Posner, 1985) or rent seeking. Traditional law and economics analyses of products liability find that different liability regimes lead to the same market outcome in terms of product safety and output (e.g., Daughety and Reinganum, 2018). This irrelevance result practically excludes rent seeking on part of the consumers as an explanation for the above observation. The very small literature on the political economy of products liability so far focuses particularly on lawyers’ efforts in changing the structure of the law (Epstein, 1988, Rubin and Bailey, 1994, Rubin, 2005).

We present a setting in which products liability is costly and show that, nevertheless, some consumers strictly benefit from products liability, and in some constellations all consumers do. Our formal analysis can support the informal discussion in Osborne (2002) that recent developments of products liability may be largely due to efforts by consumers.

Section snippets

Consumers.

Consumers may purchase a product that generates gross consumption benefit v. Consumers may suffer harm h after an accident due to the consumption of the product. The probability of an accident is 1x, where x denotes (observable) product safety. Consumers may sue the firm under strict liability for damages amounting to δh, thereby incurring litigation costs where is distributed according to G() on [0,L]. We assume L<h, δ[0,1], and g()0.

Firm.

A monopolist chooses the product safety x and the

Stage 3 (Litigation Decisions).

After an accident, consumers with δh sue the firm for compensation δh. We will refer to consumers who (do not) sue the firm as type S (N) consumers.

Stage 2 (Consumption Decisions).

Consumers S obtain an expected net benefit US(x,p,δ)=vp(1x)h+(1x)[δh]from consuming the product. Consumers N obtain an expected net benefit UN(x,p,δ)=vp(1x)h=US(x,p,δ)(1x)[δh].Consumers purchase the product only if UJ0, J=N,S.

Stage 1 (Monopolist’s Decisions).

The firm maximizes expected profits using p and x. The firm may select to serve either consumers of type S

Conclusion

We present a simple framework that describes consumer preferences for products liability, finding that some consumers support and no consumer objects its introduction despite its inefficiency. We sketch a constellation in which all consumers prefer the same partial compensation of losses. In our framework, products liability reduces efficiency due to litigation costs, excessive product safety levels, and a possible contraction of output.

Our analysis is limited in several ways. We abstract from

Acknowledgement

Part of this paper was written while Friehe and Schulte were visiting EconomiX and University Paris Nanterre. Their support is gratefully acknowledged.

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