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Product Liability versus Reputation

Author

Listed:
  • Juan José Ganuza
  • Fernando Gomez
  • Marta Robles

Abstract

Market reputation is often perceived as a cheaper alternative to product liability in the provision of safety incentives. We explore the interaction between legal and reputational sanctions using the idea that inducing safety through reputation requires implementing costly "market sanctioning" mechanisms. We show that law positively affects the functioning of market reputation by reducing its costs. We also show that reputation and product liability are not just substitutes but also complements. We analyze the effects of different legal policies, and namely that negligence reduces reputational costs more intensely than strict liability, and that court errors in determining liability interfere with reputational cost reduction through law. A more general result is that any variant of an ex post liability rule will improve the functioning of market reputation in isolation. We complicate the basic analysis with endogenous prices and observability by consumers of the outcome of court’s decisions. (JEL K13, K23, L51, H24)

Suggested Citation

  • Juan José Ganuza & Fernando Gomez & Marta Robles, 2016. "Product Liability versus Reputation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 32(2), pages 213-241.
  • Handle: RePEc:oup:jleorg:v:32:y:2016:i:2:p:213-241.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewv031
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    Citations

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    Cited by:

    1. Casalin, Fabrizio & Dia, Enzo, 2019. "Information and reputation mechanisms in auctions of remanufactured goods," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 185-212.
    2. Artigot, Mireia & Ganuza, Juan José & Gomez, Fernando & Penalva, Jose, 2018. "Product liability should reward firm transparency," International Review of Law and Economics, Elsevier, vol. 56(C), pages 160-169.
    3. Doh-Shin Jeon & Yassine Lefouili & Leonardo Madio, 2021. "Platform Liability and Innovation," Working Papers 21-05, NET Institute.
    4. Alessandro De Chiara, 2018. "Courts' Decisions, Cooperative Investments, and Incomplete Contracts," CEU Working Papers 2018_5, Department of Economics, Central European University.
    5. Alessandro De Chiara & Juan-José Ganuza & Fernando Gómez & Ester Manna & Adrián Segura, 2023. "Platform Liability with Reputational Sanctions," Working Papers 1403, Barcelona School of Economics.
    6. Franco Mariuzzo & Peter Ormosi & Zherou Majied, 2019. "Public and reputational sanctions: The case of cartels," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2018-06v3, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    7. Prüfer, Jens, 2018. "Trusting privacy in the cloud," Information Economics and Policy, Elsevier, vol. 45(C), pages 52-67.
    8. Mariuzzo, Franco & Ormosi, Peter L & Majied, Zherou, 2020. "Fines and reputational sanctions: The case of cartels," International Journal of Industrial Organization, Elsevier, vol. 69(C).
    9. Rosa Ferrer Zarzuela & Helena Perrone, 2017. "Consumers’ costly responses to product-harm crises," Economics Working Papers 1571, Department of Economics and Business, Universitat Pompeu Fabra.
    10. De Chiara, Alessandro & Elizalde, Idoia & Manna, Ester & Segura-Moreiras, Adrian, 2021. "Car accidents in the age of robots," International Review of Law and Economics, Elsevier, vol. 68(C).
    11. Tim Friehe & Cat Lam Pham & Thomas J. Miceli, 2022. "Product Liability and Strategic Delegation: Endogenous Manager Incentives Promote Strict Liability," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 61(2), pages 149-169, September.
    12. Baumann, Florian & Rasch, Alexander, 2020. "Product liability and reasonable product use," ZEW Discussion Papers 20-071, ZEW - Leibniz Centre for European Economic Research.
    13. Chen, Yizheng & Li, Jingkui & Tian, Guoqiang, 2022. "Reputation and liability in experience goods markets with imperfect monitoring," Economics Letters, Elsevier, vol. 220(C).
    14. Matthias Fahn & Valeria Merlo & Georg Wamser, 2017. "Relational Contracts, the Cost of Enforcing Formal Contracts, and Capital Structure Choice - Theory and Evidence," Economics working papers 2017-11, Department of Economics, Johannes Kepler University Linz, Austria.
    15. Juan‐José Ganuza & Fernando Gomez, 2022. "Designing relational sanctions in buyer–supplier relationships," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(2), pages 470-491, April.

    More about this item

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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