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Optimal Damages Multipliers in Oligopolistic Markets

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  • Florian Baumann
  • Tim Friehe

Abstract

This paper establishes that tort damages multipliers greater 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 or complementarity when products are heterogeneous, firms' cost structures, and the mode of competition.

Suggested Citation

  • Florian Baumann & Tim Friehe, 2015. "Optimal Damages Multipliers in Oligopolistic Markets," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 171(4), pages 622-640, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201512)171:4_622:odmiom_2.0.tx_2-h
    DOI: 10.1628/093245613X14303814418323
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    Cited by:

    1. Baniak Andrzej & Grajzl Peter & Joseph Guse A., 2014. "Producer Liability and Competition Policy When Firms Are Bound by a Common Industry Reputation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 14(4), pages 1-32, October.
    2. Eric Langlais & Maxime Charreire, 2020. "Should environment be a concern for competition policy when firms face environmental liability ?," EconomiX Working Papers 2020-25, University of Paris Nanterre, EconomiX.
    3. Eric Langlais & Andreea Cosnita-Langlais, 2022. "Endogenous market structures, product liability, and the scope of product differentiation," EconomiX Working Papers 2022-18, University of Paris Nanterre, EconomiX.
    4. Florian Baumann & Klaus Heine, 2013. "Innovation, Tort Law, and Competition," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 169(4), pages 703-719, December.
    5. Eric Langlais & Andreea Cosnita-Langlais, 2022. "Incentives to differentiate under environmental liability laws : Product customization and precautionary effort," EconomiX Working Papers 2022-20, University of Paris Nanterre, EconomiX.
    6. Maxime Charreire & Eric Langlais, 2021. "Should environment be a concern for competition policy when firms face environmental liability ?," Post-Print hal-03208691, HAL.

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    More about this item

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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