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Product Liability, Multidimensional R&D and Innovation

Author

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  • Lin, Ping
  • Zhang, Tianle

Abstract

We study the effect of product liability on the incentives of product and safety innovation. We first develop a monopoly model in which a firm chooses both product novelty and safety in an innovation stage followed by a production stage. A greater product liability directly increases the marginal benefit of producing a safer product and thus increases product safety. However, as product liability increases, product novelty may increase or decrease, depending on the relative strengths of demand-shifting and cross-R&D effects identified in the model. Consequently, a greater product liability may decrease consumer welfare and thus total welfare. We extend the results to an oligopoly model with differentiated products and study the effects of competition measured by the number of firms and the degree of product substitutability. We find that equilibrium product novelty and safety decrease with the number of firms but exhibit non-monotonic relationships with the degree of product substitutability.

Suggested Citation

  • Lin, Ping & Zhang, Tianle, 2019. "Product Liability, Multidimensional R&D and Innovation," MPRA Paper 97078, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:97078
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    File URL: https://mpra.ub.uni-muenchen.de/97078/1/MPRA_paper_97078.pdf
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    More about this item

    Keywords

    Product Liability; Safety; Novelty; Innovation Incentive;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • 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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