On the Invariance Result of Liability Rules in Oligopoly

In this paper, we revisit the invariance result of liability rules established by Polinsky (1980. “Strict Liability vs. Negligence in a Market Setting.” The American Economic Review 70: 363–7) and Shavell (1980. “Strict Liability Versus Negligence.” Journal of Legal Studies 9: 1–25) in oligopoly. We show that in the case of linear demand functions, symmetric duopoly firms produce less than the efficient quantity levels under all of the no liability rule, the strict liability rule and the negligence rule but they take the efficient level of care under the strict liability rule and the negligence rule whereas they take no care under no liability rule. Thus, the invariance result does not hold in the case of duopoly. So, contrary to the invariance result, our result has an important implication that the liability rule in addition to the price plays a crucial role in providing a proper incentive to duopoly firms. Instead, we establish a weaker version of invariance result between the strict liability rule and the negligence rule in oligopoly with general demand functions.