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Optimal Damages Multipliers in Oligopolistic Markets

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Author Info

  • Florian Baumann

    ()
    (Faculty of Economics and Social Sciences, University of Tübingen, Germany)

  • Tim Friehe

    ()
    (Department of Economics, University of Konstanz, Germany)

Abstract

This paper establishes that tort damages multipliers higher than one can be an instrument to induce imperfectly competitive producers to invest in product safety at socially optimal levels. In their selection of product safety levels, producers seek to maximize profits, neglecting the fact that higher investment in product safety increases consumer welfare; the discrepancy between private and social safety incentives can be remedied by setting damages multipliers to values greater than one. We show that the optimal damages multiplier depends on the characteristics of competition, such as the number of firms, the degree of substitutability / complementarity when products are heterogeneous, firms' cost structures, and the mode of competition.

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Bibliographic Info

Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2012-08.

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Length: 31 pages
Date of creation: 25 Apr 2012
Date of revision:
Handle: RePEc:knz:dpteco:1208

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Related research

Keywords: product liability; product safety; market power; level of damages; punitive damages;

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References

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  1. Kahan, Marcel, 1989. "Causation and Incentives to Take Care under the Negligence Rule," The Journal of Legal Studies, University of Chicago Press, vol. 18(2), pages 427-47, June.
  2. Craswell, Richard & Calfee, John E, 1986. "Deterrence and Uncertain Legal Standards," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 279-303, Fall.
  3. Polinsky, A. Mitchell & Shavell, Steven M., 2010. "The Uneasy Case for Product Liability," Working paper 575, Regulation2point0.
  4. Nussim, Jacob & Tabbach, Avraham D., 2009. "A revised model of unilateral accidents," International Review of Law and Economics, Elsevier, vol. 29(2), pages 169-177, June.
  5. Keith N. Hylton & Thomas J. Miceli, 2002. "Should Tort Damages Be Multiplied?," Working papers 2002-45, University of Connecticut, Department of Economics.
  6. Bhole, Bharat, 2007. "Due-care standards in a market setting with legal error," International Review of Law and Economics, Elsevier, vol. 27(2), pages 154-169.
  7. Häckner, Jonas, 1999. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Research Papers in Economics 1999:9, Stockholm University, Department of Economics.
  8. Boyd, James & Ingberman, Daniel E., 1999. "Do punitive damages promote deterrence?1," International Review of Law and Economics, Elsevier, vol. 19(1), pages 47-68, March.
  9. Doughety, Andrew F & Reinganum, Jennifer F, 1997. "Everybody Out of the Pool: Products Liability, Punitive Damages, and Competition," Journal of Law, Economics and Organization, Oxford University Press, vol. 13(2), pages 410-32, October.
  10. Polinsky, A Mitchell & Rubinfeld, Daniel L, 1988. "The Welfare Implications of Costly Litigation for the Level of Liability," The Journal of Legal Studies, University of Chicago Press, vol. 17(1), pages 151-64, January.
  11. Kaplow, Louis & Shavell, Steven, 1996. "Accuracy in the Assessment of Damages," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 191-210, April.
  12. Baumann, Florian & Friehe, Tim & Grechenig, Kristoffel, 2011. "A note on the optimality of (even more) incomplete strict liability," International Review of Law and Economics, Elsevier, vol. 31(2), pages 77-82, June.
  13. James Boyd, 1994. "Risk, Liability, and Monopoly," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 1(3), pages 387-403.
  14. Bartsch, Elga, 1997. "Environmental liability, imperfect information, and multidimensional pollution control," International Review of Law and Economics, Elsevier, vol. 17(1), pages 139-146, March.
  15. Viscusi, W Kip, 2001. "The Challenge of Punitive Damages Mathematics," The Journal of Legal Studies, University of Chicago Press, vol. 30(2), pages 313-50, Part I Ju.
  16. Friehe Tim, 2010. "On Avoidance Activities After Accidents," Review of Law & Economics, De Gruyter, vol. 6(2), pages 181-195, September.
  17. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
  18. Boyd, James & Ingberman, Daniel E, 1994. "Noncompensatory Damages and Potential Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 23(2), pages 895-910, June.
  19. Alfred Endres & Tim Friehe, 2012. "Strategic R&D Investment Under Liability Law," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 19(3), pages 359-376, November.
  20. Baumann, Florian & Friehe, Tim, 2009. "On the superiority of damage averaging in the case of strict liability," International Review of Law and Economics, Elsevier, vol. 29(2), pages 138-142, June.
  21. Stéphan Marette, 2007. "Minimum safety standard, consumers’ information and competition," Journal of Regulatory Economics, Springer, vol. 32(3), pages 259-285, December.
  22. Karpoff, Jonathan M & Lott, John R, Jr, 1999. "On the Determinants and Importance of Punitive Damage Awards," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 527-73, April.
  23. repec:reg:rpubli:575 is not listed on IDEAS
  24. Viscusi, W Kip & Moore, Michael J, 1993. "Product Liability, Research and Development, and Innovation," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 161-84, February.
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Cited by:
  1. Baumann, Florian & Heine, Klaus, 2012. "Innovation, tort law, and competition," DICE Discussion Papers 78, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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