Accuracy and Costs of Dispute Resolution with Heterogeneous Consumers. A Conjectural Approach to Mass Litigation

This study focuses on the tradeoff between accuracy and costs in consumer mass dispute resolution. The model investigates how a defendant-firm formulates its settlement offer given the fact that faces a large population of heterogeneously risk-averse claimants. Although firms can learn something about consumers’ reaction to a given settlement offer thanks to repeated litigation, equilibrium settlement can be far –i.e. lower– from the correct claim value. From the societal perspective, this brings up the issue related to the desirability of out-ofthe-court cheaper resolution and the risk of underpricing the value at stake. The paper also deals with the effects of aggregate litigation as an additional means to resolve consumer mass litigation. Results show that the overall cost of dispute resolution (aggregated costs of in-court-litigation plus costs of inaccuracy) is generally decreasing in the unit litigation cost. This suggests that litigation costs may be used as a leverage to favour not only more, but also more accurate, settlements. Finally, aggregate litigation might push the business defendant to negotiate a more generous settlement