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Incentives to differentiate under environmental liability laws : Product customization and precautionary effort

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  • Eric Langlais
  • Andreea Cosnita-Langlais

Abstract

We endogenize location/product specification choices in a spatial Cournot duopoly on the linear market, when firms' output entails an accidental harm to the environment. Under a strict liability regime, the equilibrium involves no differentiation when the expected harm is low enough. This outcome is suboptimal, and identical to the spatial pattern obtained under a no-liability regime. With larger harm, the equilibrium displays some dispersion/product differentiation, the degree of which is increasing with the level of harm towards the first best locations/product choices. Our results are robusts when allowing for firms' investment in environmental measures. Moreover, we show that vertical/care differentiation occurs whenever horizontal product differentiation arises. Finally, we show that under a negligence rule, firms always comply with the due care level, but the equilibrium involves no differentiation, either horizontal/product or vertical/care.

Suggested Citation

  • 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.
    • Handle: RePEc:drm:wpaper:2022-20
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    More about this item

    Keywords

    Cournot competition; spatial model; strategic location; product choice; horizontal differentiation; vertical differentitation; environmental liability; strict liability; negligence.;
    All these keywords.

    JEL classification:

    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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