Products Liability, Consumer Misperceptions, and Market Power

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 liability. However, there is a limit to how much the negligence rule can encourage extra consumption. It is shown that if market power is sufficiently large, the rule of no liability may then be preferred to the negligence rule. Without any liability imposed, producers will not choose the first-best accident probability. However, this may be more than compensated for by the increased output of the industry.

Efficient Reliance and Contract Remedies

Parties to a contract often must engage in expenditures prior to the performance of the contract to either prepare for or make use of the performance of the contract. Legal institutions provide for contract enforcement either by specifically enforcing contractually specified actions or by requiring that the breacher pay the breachee an amount of money called damages. This paper analyzes the impact of varying the enforcement institution on the incentives to rely. An unambiguous ranking of specific performance and five damage measures are obtained in terms of efficiency of the reliance decision

The Social Costs of Monopoly and Regulation: A Game-Theoretic Analysis

The theory of rent-seeking is that monopoly profits attract resources directed into efforts to obtain these profits and that the opportunity costs of these resources are a social cost of monopoly. This article shows that monopoly rents remain untransformed to the extent that firms are inframarginal in the competition for them and thereby earn profits. Different fixed organization costs can produce inframarginal firms. In a situation where a monopoly franchise is periodically reassigned, the incumbent may possess an advantage in the next year's hearings. This also results in untransformed rents

The Social Costs of Monopoly and Regulation: A Game Theoretic Analysis

The theory of rent-seeking is that monopoly profits attract resources directed into efforts to obtain these profits and that the opportunity costs of these resources are a social cost of monopoly. This article shows that monopoly rents remain untransformed to the extent that firms are inframarginal in the competition for them and thereby earn profits. Different fixed organization costs can produce inframarginal firms. In a situation where a monopoly franchise is periodically reassigned, the incumbent may possess an advantage in the next year's hearings. This also results in untransformed rents

Aggregate Expected Consumer Surplus as a Welfare Index with an Application to Price Stabilization

This paper presents necessary and sufficient conditions for the expected value of consumer surplus to correctly represent a consumer's preferences. A theorem characterizing utility functions which represent preferences over conditional probabilities is used to derive this. An application to price stabilization policy is presented

On the relationship between historic cost, forward-looking cost and long run marginal cost

This paper considers a simple model where a firm must make sunk investments in long-lived assets in order to produce output, there are constant returns to scale within each period, and the replacement cost of assets is weakly falling over time. It is shown that, so long as demand is weakly increasing over time, a simple formula can be used to calculate the long run marginal cost of production each period and that the firm breaks even if prices are set equal to long run marginal cost. Furthermore, the formula for calculating long run marginal cost can be interpreted as either a formula for calculating forward looking cost (where the current cost of using assets is based on the current replacement cost of assets) or as a formula for calculating historic cost (where the current cost of using assets is based on the actual historic purchase cost of assets.) In particular, then, the paper identifies a set of circumstances in which traditional accounting rules that allocate the cost of purchasing assets across all periods that the assets will be used can be used to calculate the true long run marginal cost of production. The result has applications both to the theory of calculating efficient prices under cost-based regulation and to the theory of how for-profit firms use accounting data to organize and guide their decision-making

Speculative Inventory Holding and Price Stability

[Introduction] As is true for many economic phenomena, the nature and effects of speculative carryover can be investigated from two polar viewpoints: perfect competition and monopoly. The competitive speculator does not expect his actions to affect current or future prices. He forms expectations about future prices on the basis of current and past prices and on possibly other information and then acts accordingly. The monopolistic speculator understands that his actions affect current and future prices--not only because his excess demand is part of aggregate excess demand but also because his actions may result in altered expectations on the part of other participants in the market