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Optimal damages multipliers in oligopolistic markets

  • Baumann, Florian
  • Friehe, Tim

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.

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Paper provided by Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE) in its series DICE Discussion Papers with number 80.

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Date of creation: 2012
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Handle: RePEc:zbw:dicedp:80
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  1. Friehe Tim, 2010. "On Avoidance Activities After Accidents," Review of Law & Economics, De Gruyter, vol. 6(2), pages 181-195, September.
  2. Häckner, Jonas, 1999. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Research Papers in Economics 1999:9, Stockholm University, Department of Economics.
  3. Polinsky, A Mitchell & Rubinfeld, Daniel L, 1988. "The Welfare Implications of Costly Litigation for the Level of Liability," The Journal of Legal Studies, University of Chicago Press, vol. 17(1), pages 151-64, January.
  4. Keith N. Hylton & Thomas J. Miceli, 2005. "Should Tort Damages be Multiplied?," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(2), pages 388-416, October.
  5. Stephan Marette, 2007. "Minimum safety standard, consumer's information and competition," Working Papers 17613, Institut National de la Recherche Agronomique, France.
  6. Boyd, James & Ingberman, Daniel E., 1999. "Do punitive damages promote deterrence?1," International Review of Law and Economics, Elsevier, vol. 19(1), pages 47-68, March.
  7. 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 410-32, October.
  8. Viscusi, W Kip, 2001. "The Challenge of Punitive Damages Mathematics," The Journal of Legal Studies, University of Chicago Press, vol. 30(2), pages 313-50, Part I Ju.
  9. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  10. James Boyd, 1994. "Risk, Liability, and Monopoly," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 1(3), pages 387-403.
  11. Craswell, Richard & Calfee, John E, 1986. "Deterrence and Uncertain Legal Standards," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 279-303, Fall.
  12. Louis Kaplow & Steven Shavell, 1993. "Accuracy in the Assessment of Damages," NBER Working Papers 4287, National Bureau of Economic Research, Inc.
  13. Bartsch, Elga, 1997. "Environmental liability, imperfect information, and multidimensional pollution control," International Review of Law and Economics, Elsevier, vol. 17(1), pages 139-146, March.
  14. Alfred Endres & Tim Friehe, 2012. "Strategic R&D Investment Under Liability Law," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 19(3), pages 359-376, November.
  15. Viscusi, W Kip & Moore, Michael J, 1993. "Product Liability, Research and Development, and Innovation," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 161-84, February.
  16. 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.
  17. Baumann, Florian & Friehe, Tim & Grechenig, Kristoffel, 2011. "A note on the optimality of (even more) incomplete strict liability," International Review of Law and Economics, Elsevier, vol. 31(2), pages 77-82, June.
  18. Kahan, Marcel, 1989. "Causation and Incentives to Take Care under the Negligence Rule," The Journal of Legal Studies, University of Chicago Press, vol. 18(2), pages 427-47, June.
  19. Bhole, Bharat, 2007. "Due-care standards in a market setting with legal error," International Review of Law and Economics, Elsevier, vol. 27(2), pages 154-169.
  20. Boyd, James & Ingberman, Daniel E, 1994. "Noncompensatory Damages and Potential Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 23(2), pages 895-910, June.
  21. Nussim, Jacob & Tabbach, Avraham D., 2009. "A revised model of unilateral accidents," International Review of Law and Economics, Elsevier, vol. 29(2), pages 169-177, June.
  22. repec:reg:rpubli:575 is not listed on IDEAS
  23. Karpoff, Jonathan M & Lott, John R, Jr, 1999. "On the Determinants and Importance of Punitive Damage Awards," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 527-73, April.
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