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Everybody Out of the Pool: Products Liability, Punitive Damages, and Competition

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  • Doughety, Andrew F
  • Reinganum, Jennifer F

Abstract

We examine how punitive damages and competitive forces generate equilibria which reveal the safety of a product. We model the monopoly (duopoly) provision of a product whose safety is unobservable to consumers prior to purchase, but its known by the firm(s) and can be signaled via the product's price and safety claims. Consumers' likelihood of purchase is based on the price and claim combination(s) they observe, thereby reducing the incentive for mimicry of the safer product by the less safe one. Nevertheless, absent punitive damages, there is a broad portion of the parameter space wherein no revealing equilibria exist. We characterize the minimal punitive damages necessary to ensure revelation; moreover, we find that competition reduces the minimal level of punitive damages. Competition and punitive damages are complementary in that they jointly make consumer choice more effective by creating conditions under which revealing equilibria can exist. Copyright 1997 by Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Journal of Law, Economics and Organization.

Volume (Year): 13 (1997)
Issue (Month): 2 (October)
Pages: 410-32

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Handle: RePEc:oup:jleorg:v:13:y:1997:i:2:p:410-32

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Cited by:
  1. J.-C. Bureau & E. Gozlan & S. Marette, 1999. "Quality signaling and international trade in food products," THEMA Working Papers 99-13, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  2. Calcott, Paul, 2008. "Liability and manufacturer warnings," International Review of Law and Economics, Elsevier, vol. 28(2), pages 98-105, June.
  3. Bruce Hay & Kathryn E. Spier, 2005. "Manufacturer Liability for Harms Caused by Consumers to Others," American Economic Review, American Economic Association, vol. 95(5), pages 1700-1711, December.
  4. Steven Shavell, 2005. "Liability for Accidents," NBER Working Papers 11781, National Bureau of Economic Research, Inc.
  5. McCluskey, Jill J. & Loureiro, Maria L., 2005. "Reputation and Production Standards," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 30(01), April.
  6. Stéphan Marette, 2007. "Minimum safety standard, consumers’ information and competition," Journal of Regulatory Economics, Springer, vol. 32(3), pages 259-285, December.
  7. J. M. Crespi & S. Marette, 1999. "Cartel stability and suality signalling," THEMA Working Papers 99-29, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  8. Baumann, Florian & Friehe, Tim, 2012. "Optimal damages multipliers in oligopolistic markets," DICE Discussion Papers 80, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  9. Ram Singh, 2008. "Risk, Informational Asymmetry and Product Liability; An enquiry into conflicting objectives," Working papers 164, Centre for Development Economics, Delhi School of Economics.
  10. B. Coestier & E. Gozlan & Stephan Marette, 2003. "La responsabilité des entreprises et le risque d'obésité," THEMA Working Papers 2003-42, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  11. Chu, C.Y. Cyrus & Huang, Chen-Ying, 2004. "On the definition and efficiency of punitive damages," International Review of Law and Economics, Elsevier, vol. 24(2), pages 241-254, June.
  12. John Crespi & Stéphan Marette, 2003. "“Does Contain†vs. “Does Not Containâ€: Does it Matter which GMO Label is Used?," European Journal of Law and Economics, Springer, vol. 16(3), pages 327-344, November.
  13. Andrew F. Daughety & Jennifer F. Reinganum, 2011. "Economic Analysis of Products Liability: Theory," Vanderbilt University Department of Economics Working Papers 1107, Vanderbilt University Department of Economics.
  14. Bruce Hay & Kathryn E. Spier, 2004. "Manufacturer Liability for Harms Caused by Consumers to Others," NBER Working Papers 10972, National Bureau of Economic Research, Inc.

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