William P. Rogerson
NBER Working Papers and Publications
|July 1982||Products Liability, Consumer Misperceptions, and Market Power|
with A. Mitchell Polinsky: w0937
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...
Published: Polinsky, A. Mitchell and William P. Rogerson. "Products Liability, Consumer Misperceptions, and Market Power." Bell Journal of Economics, Vol. 14, No. 2, (Autumn 1983), pp.581-589. citation courtesy of