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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.

Suggested Citation

  • 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 410-432, October.
  • Handle: RePEc:oup:jleorg:v:13:y:1997:i:2:p:410-32
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    Cited by:

    1. 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.
    2. Bureau, J.-C. & Gozlan, E. & Marette, S., 1999. "Quality Signaling and International Trade in Food Products," Papers 99-13, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
    3. Andrew F. Daughety & Jennifer F. Reinganum, 2013. "Economic analysis of products liability: Theory," Chapters,in: Research Handbook on the Economics of Torts, chapter 3, pages 69-96 Edward Elgar Publishing.
    4. John Crespi & Stéphan Marette, 2003. "“Does Contain” vs. “Does Not Contain”: Does it Matter which GMO Label is Used?," European Journal of Law and Economics, Springer, vol. 16(3), pages 327-344, November.
    5. Rhodes, Andrew & Wilson, Chris M, 2015. "False Advertising," MPRA Paper 68869, University Library of Munich, Germany.
    6. Bénédicte Coestier & Estelle Gozlan & Stéphan Marette, 2005. "On Food Companies Liability for Obesity," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(1), pages 1-14.
    7. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Found Money? Split-Award Statutes and Settlement of Punitive Damages Cases," American Law and Economics Review, Oxford University Press, vol. 5(1), pages 134-164.
    8. Steven Shavell, 2005. "Liability for Accidents," NBER Working Papers 11781, National Bureau of Economic Research, Inc.
    9. Marette, S. & Crepsi, J.M., 1999. "Cartel Stability and Quality Signaling," Papers 99-29, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
    10. Ram Singh, 2009. "RISK, INFORMATIONAL ASYMMETRY AND PRODUCT LIABILITY: An Enquiry Into Conflicting Objectives," Pacific Economic Review, Wiley Blackwell, vol. 14(1), pages 89-112, February.
    11. 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.
    12. 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.
    13. 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.
    14. Calcott, Paul, 2008. "Liability and manufacturer warnings," International Review of Law and Economics, Elsevier, vol. 28(2), pages 98-105, June.
    15. 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.
    16. Stéphan Marette, 2007. "Minimum safety standard, consumers’ information and competition," Journal of Regulatory Economics, Springer, vol. 32(3), pages 259-285, December.
    17. 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.
    18. 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.

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