Private Law Theory

ABSTRACT
I consider a model in which firms engage in Cournot competition in producing potentially harmful products. In addition to choosing output, they also choose safety precautions, which affects each product’s likelihood of harm to third parties. The liability regime in place thus potentially affects not only the safety precautions taken by the firms, but also their production decisions. Under (individual) strict liability (SL), a firm whose product causes harm is found liable, only if causation can be established in court. Under market share liability (MSL), all firms are held liable for a fraction of harms equaling their respective market shares. Thus, SL reduces the likelihood of liability, conditional on harm, while increasing the size of damages, relative to MSL. Because MSL ties liability to a firm’s production more closely than SL, it increases firms’ effective marginal cost of production more than SL, and thereby leads to less production than SL. Moreover, SL gives firms no worse incentives to take safety precautions than MSL, as long as the probability of holding the injuring firm liable is not smaller than that firm’s market share. Therefore, under these conditions, MSL leads to less welfare than SL, as long as SL does not lead to over-optimal production. An implication is that implementing SL by randomly holding one of the firm’s in the market is superior to MSL when over-production is no concern. If over-production is a concern, randomized SL with supra-compensatory damages, or other, equivalent, randomized SL regimes can be used which ensure greater welfare than MSL. I discuss limitations, extensions and additional considerations, such as the presence of litigation costs; asymmetric equilibria; R&D incentives; and the possibility of implementing non-randomized SL with weak evidentiary requirements.

Mungan, Murat C, Market Share Liability versus (Random) Strict Liability (July 9, 2024); Texas A&M University School of Law Legal Studies Research Paper.