Multimarket firms and product liability: uniform versus variable rules

Abstract

Abstract When a multimarket firm’s product causes harm to consumers, should the firm bear uniform or variable liability across markets? We analyze a model in which the firm faces the same standard liability in two markets under uniform liability, while its liability rises above and falls below the standard level in markets 1 and 2, respectively, under variable liability. Allowing variation in product liability across markets has broad implications for the firm’s incentive to invest in product safety, total output, and output allocation across markets, as well as for the optimal choice of standard liability in the first place. We show that welfare is higher under variable liability if demand elasticity is lower and demand curvature is weakly higher in market 2 than in market 1, but welfare can be higher under uniform liability otherwise.