Product liability rules in imperfectly competitive markets: The case of Cournot oligopoly

This section considers product liability rules when markets are imperfectly competitive. The analysis focuses on the Cournot model of oligopoly. To simplify matters, we assume that all firms are identical with constant marginal costs, so C(q) = cq for each firm.

Strict liability

Under strict liability, consumers are fully compensated for all harm. Therefore, the consumer demand curve is:

Note again that consumer perceptions do not enter into the demand curve. Since consumers are fully compensated for all harm under the strict liability rule, their perceptions of the expected harm are irrelevant. Since firms must fully compensate consumers, each firm's profit is equal to:

where xi is the level of care chosen by firm i. Firms can minimise costs by choosing x = x*. Therefore, each firm's profits are:

In the Cournot model, each firm chooses its quantity, taking the choices of other firms as given. The first-order condition is:

Adding up across all n firms yields: or:

where e is the elasticity of demand. Since 1?— > 1, this price will be

1 + ? n

higher than the efficient price, which is c + wx* + H(x*). Thus, market

quantity will be inefficiently low, with the inefficiency declining with the number of firms. As in Chapter 4, the extent of price overshifting onto consumers depends on the extent to which the elasticity of ded changes as we move along the demand curve.

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