The Influence of Product Liability on Vertical Product Differentiation

46 Pages Posted: 7 May 2015

See all articles by Florian Baumann

Florian Baumann

University of Tuebingen - Faculty of Economics and Business Administration

Tim Friehe

University of Konstanz - Department of Economics

Alexander Rasch

University of Cologne

Date Written: April 29, 2015

Abstract

This paper explores the impact of product liability on vertical product differentiation when product safety is perfectly observable. In a two-stage competition, duopolistic firms are subject to strict liability and segment the market such that a low-safety product is marketed at a low price to consumers with relatively small harm levels whereas the safer product is sold at a high price to consumers with high levels of harm. Firms’ expected liability payments are critically influenced by how the market is segmented, creating a complex relationship between product liability and product differentiation. We vary the liability system’s allocation of losses between firms and consumers. Shifting more losses to firms increases the safety levels of both products, but decreases the degree of product differentiation. Some shifting of losses is always socially beneficial, but the optimum may require that some compensable losses stay with the consumers.

Keywords: product liability, accident, harm, imperfect competition, product safety, vertical product differentiation

JEL Classification: D430, K130, L130

Suggested Citation

Baumann, Florian and Friehe, Tim and Rasch, Alexander, The Influence of Product Liability on Vertical Product Differentiation (April 29, 2015). CESifo Working Paper Series No. 5315, Available at SSRN: https://ssrn.com/abstract=2603175

Florian Baumann

University of Tuebingen - Faculty of Economics and Business Administration ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

Tim Friehe (Contact Author)

University of Konstanz - Department of Economics ( email )

Konstanz, D-78457
Germany

Alexander Rasch

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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