Jump to ContentJump to Main Navigation
Show Summary Details
More options …

The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

4 Issues per year


IMPACT FACTOR 2016: 0.252
5-year IMPACT FACTOR: 0.755

CiteScore 2016: 0.48

SCImago Journal Rank (SJR) 2016: 0.330
Source Normalized Impact per Paper (SNIP) 2016: 0.526

Online
ISSN
1935-1682
See all formats and pricing
More options …
Volume 14, Issue 4

Issues

Volume 18 (2018)

Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

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

Andrzej Baniak / Peter Grajzl
  • Corresponding author
  • Department of Economics, The Williams School, Washington and Lee University, Lexington, VA 24450, USA
  • Email
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ A. Joseph Guse
Published Online: 2014-05-03 | DOI: https://doi.org/10.1515/bejeap-2013-0168

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

References

  • Avraham, R. 2006. “Putting a Price on Pain-and-Suffering Damages: A Critique of the Current Approaches and a Preliminary Proposal for Change.” Northwestern University Law Review 100(1):87–120.Google Scholar

  • Baniak, A., and P. Grajzl. 2013. “Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects.” Review of Law and Economics 9(2):265–302.Google Scholar

  • Barnett, M. L., and A. J. Hoffman. 2008. “Beyond Corporate Reputation: Managing Reputational Interdependence.” Corporate Reputation Review 11(1):1–9.CrossrefGoogle Scholar

  • Baumann, F., and T. Friehe. 2012. “Optimal Damages Multipliers in Oligopolistic Markets” University of Konstanz, Department of Economics Working Paper Series 2012–08.Google Scholar

  • Carriquiry, M., and B. B. Babcock. 2007. “Reputations, Market Structure, and the Choice of Quality Assurance Systems in the Food Industry.” American Journal of Agricultural Economics 89(1):12–23.CrossrefWeb of ScienceGoogle Scholar

  • Chen, Y., and X. Hua. 2012. “Ex Ante Investment, Ex Post Remedies, and Product Liability.” International Economic Review 53(3):845–66.CrossrefWeb of ScienceGoogle Scholar

  • Chiang, S-C. and R. T. Masson. 1988. “Domestic Industrial Structure and Export Quality.” International Economic Review 29(2):261–70.CrossrefGoogle Scholar

  • Daughety, A. F., and J. F. Reinganum. 1995. “Product Safety: Liability, R&D, and Signaling.” American Economic Review 85(5):1187–206.Google Scholar

  • Daughety, A. F., and J. F. Reinganum. 1997. “Everybody Out Of the Pool: Products Liability, Punitive Damages, and Competition.” Journal of Law, Economics, and Organization 13(2):410–32.CrossrefGoogle Scholar

  • Daughety, A. F., and J. F. Reinganum. 2006. “Markets, Torts, and Social Inefficiency.” RAND Journal of Economics 37(2):300–23.CrossrefGoogle Scholar

  • Daughety, A. F., and J. F. Reinganum. 2012. “Cumulative Harm and Resilient Liability Rules for Product Markets.” Journal of Law, Economics, and Organization. Forthcoming. .CrossrefWeb of ScienceGoogle Scholar

  • Daughety, A. F., and J. F. Reinganum. 2014. “Economic Analysis of Products Liability: Theory.” In Research Handbook on the Economics of Torts, edited by J. Arlen, 69–96. Cheltenham: Edward Elgar.Google Scholar

  • De Geest, G., and G. Dari-Mattiacci. 2007. “Soft Regulators, Tough Judges.” Supreme Court Economic Review 15(1):119–40.Google Scholar

  • Epple, D., and A. Raviv. 1978. “Product Safety: Liability Rules, Market Structure, and Imperfect Information.” American Economic Review 68(1):80–95.Google Scholar

  • Fleckinger, P. 2007. “Collective Reputation and Market Structure: Regulating the Quality vs. Quantity Trade-Off.” Ecole Polytechnique Cahier nº 2007–26.Google Scholar

  • Geistfeld, M. A. 2009. “Products Liability.” In Tort Law and Economics, Encyclopedia of Law and Economics, Second Edition, edited by M. Faure, 287–340. Cheltenham: Edward Elgar.Google Scholar

  • Hattori, K., and T. Yoshikawa. 2013. “Free Entry and Social Inefficiency under Co-opetition.” MPRA Working Paper No. 44816.Google Scholar

  • King, A. A., M. J. Lenox, and M. L. Barnett. 2002. “Strategic Responses to the Reputation Commons Problem.” In Organizations, Policy and the Natural Environment: Institutional and Strategic Perspectives, edited by A. J. Hoffman and M. J. Ventresca, 393–406. Stanford: Stanford University Press.Google Scholar

  • Landes, W. M., and R. A. Posner. 1985. “A Positive Economic Analysis of Products Liability.” Journal of Legal Studies 14(3):535–67.CrossrefGoogle Scholar

  • Levin, J. 2009. “The Dynamics of Collective Reputation.” The B.E. Journal of Theoretical Economics 9(1):Article 27.CrossrefGoogle Scholar

  • Mankiw, N. G., and M. D. Whinston. 1986. “Free Entry and Social Efficiency.” RAND Journal of Economics 17(1):48–58.CrossrefGoogle Scholar

  • Marette, S. 2007. “Minimum Safety Standards, Consumers’ Information and Competition.” Journal of Regulatory Economics 32:259–85.CrossrefGoogle Scholar

  • Marino, A. M. 1988a. “Monopoly, Liability and Regulation.” Southern Economic Journal 54(4):913–27.CrossrefGoogle Scholar

  • Marino, A. M. 1988b. “Products Liability and Scale Effects in a Long-Run Competitive Equilibrium.” International Review of Law and Economics 8:97–107.CrossrefGoogle Scholar

  • Marino, A. M. 1991. “Market Share Liability and Economic Efficiency.” Southern Economic Journal 57(3):667–75.CrossrefGoogle Scholar

  • McQuade, T., S. W. Salant, and J. Winfree. 2010. “Markets with Untraceable Goods of Unknown Quality: A Market Failure Exacerbated by Globalization.” Resources for the Future Discussion Paper 09–31.Google Scholar

  • McQuade, T., S. W. Salant, and J. Winfree. 2012. “Regulating an Experience Good Produced in the Formal Sector of a Developing Country When Consumers Cannot Identify Producers.” Review of Development Economics 16(4):512–26.CrossrefWeb of ScienceGoogle Scholar

  • “Note: Deception as an Antitrust Violation.” 2012. Harvard Law Review 125(5):1235–55.Google Scholar

  • Polinsky, A. M., and W. P. Rogerson. 1983. “Products Liability, Consumer Misperceptions, and Market Power.” Bell Journal of Economics 14(2):581–9.CrossrefGoogle Scholar

  • Polinsky, A. M., and S. Shavell. 2010. “The Uneasy Case for Product Liability.” Harvard Law Review 123:1437–92.Google Scholar

  • Pistor, K., and C. Xu. 2004. “Incomplete Law.” NYU Journal of International Law and Politics 35:931–1013.Google Scholar

  • Pouliot, S., and D. A. Sumner. 2010. “Traceability, Product Recalls, Industry Reputation and Food Safety.” Unpublished manuscript.Google Scholar

  • Rouviere, E., and R. Soubeyran. 2011. “Competition vs. Quality in an Industry with Imperfect Traceability.” Economics Bulletin 31(4):3052–67.Google Scholar

  • Rubin, P. H. 2011. “Markets, Tort Law, and Regulation to Achieve Safety.” Cato Journal 31(2):217–36.Google Scholar

  • Segerson, K. 1999. “Mandatory Versus Voluntary Approaches to Food Safety.” Agribusiness 15(1):53–70.CrossrefGoogle Scholar

  • Shavell, S. 1980. “Strict Liability Versus Negligence.” Journal of Legal Studies 9(1):1–25.Web of ScienceCrossrefGoogle Scholar

  • Shavell, S. 1984. “Liability for Harm Versus Regulation of Safety.” Journal of Legal Studies 13(2):357–74.CrossrefGoogle Scholar

  • Shavell, S. 2004. Foundations of Economic Analysis of Law. Cambridge, MA: Belknap Press/Harvard University Press.Google Scholar

  • Shavell, S. 2007. “Liability for Accidents.” In: Handbook of Law and Economics, Vol. I, edited by S.Shavell, and A. Mitchell Polinsky, 139–182. Amsterdam, The Netherlands: Elsevier.Google Scholar

  • Spence, M. 1977. “Consumer Misperceptions, Product Failure, and Producer Liability.” Review of Economic Studies 44(3):561–72.CrossrefGoogle Scholar

  • Spulber, D. F. 1988. “Products Liability and Monopoly in a Contestable Market.” Economica 55(219):333–41.CrossrefGoogle Scholar

  • Stucke, M. E. 2013. “Is Competition Always Good?” Journal of Antitrust Enforcement 1(1):162–97.CrossrefGoogle Scholar

  • Tirole, J. 1996. “A Theory of Collective Reputations.” Review of Economic Studies 63(1):1–22.CrossrefGoogle Scholar

  • Viscusi, W. K. 2012. “Does Product Liability Make Us Safer?” Regulation 35(1):24–31.Google Scholar

  • Winfree, J. A., and J. J. McCluskey. 2005. “Collective Reputation and Quality.” American Journal of Agricultural Economics 87(1):206–13.CrossrefGoogle Scholar

About the article

Published Online: 2014-05-03

Published in Print: 2014-10-01


Fleckinger (2007, 1), for example, describes the environments in which firms share a common reputation as “an intermediate situation between the perfect information and the asymmetric information setting”.

For recent surveys of the voluminous literature on products liability, see Daughety and Reinganum (2014), Geistfeld (2009), and Shavell (2004, 2007).

Baniak and Grajzl (2013) study the interaction of strict producer liability and industry reputation effects in a model of torts where harm occurs in a non-market setting.

See Hattori and Yoshikawa (2013) for a model with endogenous firm investments in a common property resource that could be interpreted as representing firms’ common reputation.

For discussion about the relationship between tort law and antitrust law, see also “Note: Deception as an Antitrust Violation” (2012).

The traditional products liability model summarized by Daughety and Reinganum (2014) in fact implies that profit-maximizing firms choose the socially optimal level of precaution regardless of the liability rule in place. Firms choose socially suboptimal precaution when, for example, consumers systematically misperceive the risk of harm (Spence 1977; Polinsky and Rogerson 1983; Marino 1988a). However, the level of precaution selected by firms in models where consumers misperceive risk, but at the same time all other assumptions of the traditional products liability model continue to hold, is still independent of market structure.

For analyses allowing for “scale effects” in expected harm, see Marino (1988a, 1988b) and Spulber (1988). For models featuring fixed costs of safety, see Daughety and Reinganum (2006) and Baumann and Friehe (2012).

Chiang and Masson (1988) do not provide a fully fledged welfare analysis. However, they do show that in the presence of a common industry reputation, when firms have no market power, labor is the only input, and returns to scale are constant, firm consolidation leads to higher wages.

The literature, of course, suggests reasons other than the existence of a common industry reputation for why greater intra-industry competition, as captured by the number of firms in an industry, need not increase social efficiency. One prominent reason is the existence of fixed set-up costs that firms must incur upon entry; see, e.g. Mankiw and Whinston (1986) and references therein. Another is the application of the strict market share liability rule; see Marino (1991). Stucke (2013) provides an illuminating discussion of when competition leads to suboptimal results.

Chen and Hua (2012) do not study common industry reputation effects. Instead, they focus on the impact of full producer liability, partial producer liability, and punitive damages on monopolist’s incentives to increase product safety through ex ante investment when the firm can also take ex post (i.e. after sales) remedial measures concerning product quality.

Assuming risk aversion rather than risk neutrality would render the model intractable, but would, we anticipate, not change the key qualitative insights.

In the related products liability literature that does not study implications of firms sharing a common industry reputation, linear demand is directly assumed (as opposed to derived from an underlying utility function) for example in Polinsky and Rogerson (1983) and Daughety and Reinganum (1995). In contrast, in the industrial organization literature on common industry reputation, Fleckinger (2007), for example, starts from a setup with heterogeneous consumers and develops a multiplicative inverse demand.

Another scenario that gives rise to free-riding in firms’ choice of precaution is the application of the market share liability rule, under which firms are held strictly liable for their market share of the total damages caused by the industry; see Marino (1991).

When consumers’ knowledge of risk of failure is perfect, the precise allocation of liability for losses from defective products does not matter for firms’ investments in precaution under the assumptions of the traditional products liability model (see, e.g. Shavell 1980; Landes and Posner 1985). Laissez-faire performs just as well as strict producer liability. Given administrative and litigation costs associated with products liability, laissez-faire is in fact the preferred regime.


Citation Information: The B.E. Journal of Economic Analysis & Policy, Volume 14, Issue 4, Pages 1645–1676, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2013-0168.

Export Citation

©2014 by De Gruyter. Copyright Clearance Center

Comments (0)

Please log in or register to comment.
Log in