We analyze a monopolist who offers different variants of a possibly dangerous product to heterogeneous customers. Product variants are distinguished by different safety attributes. Customers choose product usage which co-determines expected harm. We find that, even with customers being perfectly informed about product variants’ safety, product liability can further welfare by limiting the firm’s incentives to distort product safety in pursuance of profit-maximizing price discrimination. In this context, strict liability has to be accompanied by a defense of product misuse, but reasonable use of the base product variant should be defined more leniently than what an application of the Hand rule or instructions in user manuals might prescribe.
Baumann, Florian and Rasch, Alexander, Product Liability and Reasonable Product Use (2020). ZEW – Centre for European Economic Research Discussion Paper No 20-071.