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Environmental liability and product differentiation: Strict liability versus negligence revisited

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  • Cosnita-Langlais, Andreea
  • Langlais, Eric

Abstract

This paper studies the role of environmental liability in shaping firms’ product differentiation choices, both horizontally (product design) and vertically (safety), and the ensuing welfare implications. We use a spatial Cournot duopoly where firms’ activity may entail accidental environmental harm. We show that for low levels of harm, both strict liability and negligence lead to a fully symmetric equilibrium with no differentiation: strict liability provides less output and more safety (thus, lower expected environmental harm) than negligence. Nevertheless, negligence affords higher welfare. For higher environmental harm, only strict liability yields an equilibrium where firms differentiate both horizontally and vertically: each firm becomes dominant (dominated) on a subset of local markets, where it delivers more (less) output and much more (less) safety than in the no-differentiation equilibrium under negligence. In this case, strict liability provides higher welfare.

Suggested Citation

  • Cosnita-Langlais, Andreea & Langlais, Eric, 2024. "Environmental liability and product differentiation: Strict liability versus negligence revisited," International Review of Law and Economics, Elsevier, vol. 79(C).
  • Handle: RePEc:eee:irlaec:v:79:y:2024:i:c:s0144818824000346
    DOI: 10.1016/j.irle.2024.106214
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    More about this item

    Keywords

    Spatial Cournot competition; Strategic location; Horizontal differentiation; Vertical differentiation; Environmental liability; Strict liability; Negligence;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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