Product Liability and Reasonable Product Use

A monopolist offers different variants of a possibly dangerous product to heterogeneous customers who choose among product variants that are distinguished by different safety levels. Customers’ choice of product use codetermines expected harm. We find that even when customers are perfectly informed about product variants’ safety, product liability can increase welfare by limiting the firm’s incentives to distort product safety in pursuance of profit-maximizing price discrimination. In this context, strict liability has to be accompanied by a defense of contributory negligence on the part of customers, who may have used the product in an unreasonable manner. However, reasonable use of the base product variant should be defined more leniently than prescribed by the Hand rule or instructions in user manuals. If a perfect negligence regime for product liability is feasible, a complete denial of the defense of customer negligence allows the achievement of the first-best allocation.