Products Liability, Consumer Misperceptions, and Market Power / A. Mitchell Polinsky, William P. Rogerson.

Format:

Book

Author/Creator:

Polinsky, A. Mitchell.

Contributor:

National Bureau of Economic Research.

Rogerson, William P.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0937.

NBER working paper series no. w0937

Language:

English

Subjects (All):

Consumer protection.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1982.

Cambridge, Mass. : National Bureau of Economic Research, 1982.

Summary:

This paper compares alternative liability rules for allocating losses from defective products when consumers under- estimate these losses and producers may have some market power. If producers do not have any market power, the rule of strict liability .leads to both the first-best accident probability and industry output. If producers do have some market power, strict liability still leads to the first-best accident probability, but there will now be too little output of the industry. It is shown that if market power is sufficiently large, a negligence rule is preferable. Under this rule, firms can still be induced to choose the first-best accident probability, but now the remaining damages are borne by consumers. Since consumers underestimate these damages, they buy more than under strict liability. However, there is a limit to how much the negligence rule can encourage extra consumption. It is shown that if market power is sufficiently large, the rule of no liability may then be preferred to the negligence rule. Without any liability imposed, producers will not choose the first-best accident probability. However, this may be more than compensated for by the increased output of the industry.

Notes:

Print version record

July 1982.

Includes bibliographical references.