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Optimal Damages Multipliers in Oligopolistic Markets

Author

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  • 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.

Suggested Citation

  • Florian Baumann & Tim Friehe, 2012. "Optimal Damages Multipliers in Oligopolistic Markets," Working Paper Series of the Department of Economics, University of Konstanz 2012-08, Department of Economics, University of Konstanz.
  • Handle: RePEc:knz:dpteco:1208
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    References listed on IDEAS

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    1. Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, pages 1187-1206.
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    3. Viscusi, W Kip, 2001. "The Challenge of Punitive Damages Mathematics," The Journal of Legal Studies, University of Chicago Press, pages 313-350.
    4. Alfred Endres & Tim Friehe, 2012. "Strategic R&D Investment Under Liability Law," International Journal of the Economics of Business, Taylor & Francis Journals, pages 359-376.
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    13. Friehe Tim, 2010. "On Avoidance Activities After Accidents," Review of Law & Economics, De Gruyter, vol. 6(2), pages 181-195, September.
    14. 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.
    15. Boyd, James & Ingberman, Daniel E, 1994. "Noncompensatory Damages and Potential Insolvency," The Journal of Legal Studies, University of Chicago Press, pages 895-910.
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    20. 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.
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    27. repec:reg:rpubli:575 is not listed on IDEAS
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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, pages 1-32.
    2. 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.

    More about this item

    Keywords

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

    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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