Handbook of Game Theory and Industrial Organization, Volume II
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Handbook of Game Theory and Industrial Organization, Volume II

Applications

Edited by Luis C. Corchón and Marco A. Marini

This second volume of the Handbook includes original contribution by experts in the field. It provides up-to-date surveys of the most relevant applications of game theory to industrial organization. The book covers both classical as well as new IO topics such as mergers in markets with homogeneous and differentiated goods, leniency and coordinated effects in cartels and mergers, static and dynamic contests, consumer search and product safety, strategic delegation, platforms and network effects, auctions, environmental and resource economics, intellectual property, healthcare, corruption, experimental industrial organization and empirical models of R & D.
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Chapter 9: Market structure, liability, and product safety

Andrew F. Daughety and Jennifer F. Reinganum

Extract

In this chapter we consider how models of imperfect competition, developed by scholars working in industrial organization (IO), provide insight into an important area of law: products liability (that is, liability for harms and losses associated with goods and services sold via markets). This importance derives from the fact that everyday life generally involves consumption activities wherein the risk of harm is present: we all consume manufactured goods and commercially harvested and/or prepared foods, translocate or telecommute between home and employment, and occupy space in buildings and homes that condition the air we breathe and the light we use (not to mention relying on the safety of those structures). Remarkably, traditional law and economics (L & E) analyses of products liability generally find no role for the influence of market structure or strategic interaction on liability policy. Two results come from the traditional analysis. First, different liability regimes (to be detailed below) lead to the same private choices of safety, and this private choice is the socially optimal level of safety. Second, alternativemarket structures (perfect competition, monopoly, oligopoly) have no effect on the level of safety chosen by firms. In what follows, after briefly summarizing the traditional analysis, we consider two simple (but plausible) model modifications that yield a substantial impact of market structure on the choice of safety and (potentially) on the choice of liability regime. Section 2 provides a summary of the traditional model used to consider unilateral precaution in the case of harms due to products; Section 3 then reconsiders the traditional model of harm while Section 4 reconsiders the traditional model of production cost. In both Sections 3 and 4 we first consider monopoly provision of the product and then extend the model to the case of oligopoly competition. Section 5 provides a brief review of additional contributions to this literature and summary comments.

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