TY  - JOUR
AU  - Polinsky,A. Mitchell
AU  - Rogerson,William P.
TI  - Products Liability, Consumer Misperceptions, and Market Power
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 937
PY  - 1982
Y2  - July 1982
UR  - http://www.nber.org/papers/w0937
L1  - http://www.nber.org/papers/w0937.pdf
N1  - Author contact info:
A. Mitchell Polinsky
Stanford Law School
Stanford University
Stanford, CA  94305
Tel: 650/723-0886
Fax: 650/723-3557
E-Mail: polinsky@stanford.edu

William P. Rogerson
Northwestern University
E-Mail: wrogerson@northwestern.edu
AB  - This paper compares alternative liability rules for allocating losses from defective products when consumers under- estimate these losses and producers may have some market power. If producers do not have any market power, the rule of strict liability .leads to both the first-best accident probability and industry output. If producers do have some market power, strict liability still leads to the first-best accident probability, but there will now be too little output of the industry. It is shown that if market power is sufficiently large, a negligence rule is preferable. Under this rule, firms can still be induced to choose the first-best accident probability, but now the remaining damages are borne by consumers. Since consumers underestimate these damages, they buy more than under strict liability. However, there is a limit to how much the negligence rule can encourage extra consumption. It is shown that if market power is sufficiently large, the rule of no liability may then be preferred to the negligence rule. Without any liability imposed, producers will not choose the first-best accident probability. However, this may be more than compensated for by the increased output of the industry.
ER  -