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Optimal damages multipliers in oligopolistic markets

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  • Baumann, Florian
  • Friehe, Tim

Abstract

This paper establishes that tort damages multipliers higher than one can be an instrument to induce imperfectly competitive producers to invest in product safety at socially optimal levels. In their selection of product safety levels, producers seek to maximize profits, neglecting the fact that higher investment in product safety increases consumer welfare; the discrepancy between private and social safety incentives can be remedied by setting damages multipliers to values greater than one. We show that the optimal damages multiplier depends on the characteristics of competition, such as the number of firms, the degree of substitutability/complementarity when products are heterogeneous, firms' cost structures, and the mode of competition.

Suggested Citation

  • Baumann, Florian & Friehe, Tim, 2012. "Optimal damages multipliers in oligopolistic markets," DICE Discussion Papers 80, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    • Handle: RePEc:zbw:dicedp:80
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    References listed on IDEAS

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    Cited by:

    1. Baumann Florian & Friehe Tim, 2024. "On the Role of Sales Taxes for Efficient Compensation of Property Loss Under Strict Liability," Review of Law & Economics, De Gruyter, vol. 20(1), pages 21-34.
    2. Baniak Andrzej & Grajzl Peter & Joseph Guse A., 2014. "Producer Liability and Competition Policy When Firms Are Bound by a Common Industry Reputation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 14(4), pages 1645-1676, October.
    3. Charreire, Maxime & Langlais, Eric, 2021. "Should environment be a concern for competition policy when firms face environmental liability?," International Review of Law and Economics, Elsevier, vol. 67(C).
    4. Eric Langlais & Andreea Cosnita-Langlais, 2022. "Endogenous market structures, product liability, and the scope of product differentiation," EconomiX Working Papers 2022-18, University of Paris Nanterre, EconomiX.
    5. Florian Baumann & Klaus Heine, 2013. "Innovation, Tort Law, and Competition," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 169(4), pages 703-719, December.
    6. Eric Langlais & Andreea Cosnita-Langlais, 2022. "Incentives to differentiate under environmental liability laws : Product customization and precautionary effort," EconomiX Working Papers 2022-20, University of Paris Nanterre, EconomiX.

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    More about this item

    Keywords

    product liability; product safety; market power; level of damages; punitive damages;
    All these keywords.

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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