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Market entry and product liability

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  • Friehe, Tim
  • Pham, Cat Lam

Abstract

Cournot competition with fixed entry costs can lead to excessive market entry. We examine how product liability regimes influence firm entry decisions within a framework where consumers may misperceive product risk. We demonstrate that market entry can be insufficient when consumers overestimate product risk and are not fully compensated for their losses. Furthermore, our analysis reveals that endogenous entry eliminates the “output effect,” a mechanism commonly invoked in models with a fixed number of firms to establish that a no-liability regime can be socially optimal. Our findings suggest that Strict Liability with full compensation for consumer losses is socially optimal in Cournot markets with endogenous entry.

Suggested Citation

  • Friehe, Tim & Pham, Cat Lam, 2025. "Market entry and product liability," Economics Letters, Elsevier, vol. 254(C).
    • Handle: RePEc:eee:ecolet:v:254:y:2025:i:c:s0165176525002824
    DOI: 10.1016/j.econlet.2025.112445
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    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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