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Platform Liability, Product Safety and Optimal Pricing

Date: March 27, 2025 (Thursday) Time: 1pm – 2pm Venue: Room 723, 7/F Cheng Yu Tung Tower, The University of Hong Kong Speaker: Gerd Muehlheusser, Professor of Microeconomics, Department of Economics, University of Hamburg Should (digital) platforms be held legally responsibility for harm caused by products or services provided by third-parties sellers? We study this question in a setting in which product safety (likelihood of accidents) is in the hands of a third-party seller, while the consumer price is set by a monopolistic platform (who pays the seller a commission). When an accident occurs, the harm is divided between the platform and the seller according to a liability rule (strict partial liability) set by a welfare-maximizing policymaker ex ante. Apart from the liability regime, the seller’s incentive to provide high product safety also depends on the overall demand as determined by the price chosen by the platform. The platform’s optimal pricing reflects a trade-off between extracting the maximum revenue from consumers and expected liability costs (which also depend on the level of product safety provided by the seller). This might induce the platform to price below the monopoly price in order to foster demand, thereby increasing the seller’s incentive to provide high product safety. We then show that the optimal liability rule chosen by the welfare-maximizing policymaker is dichotomous: It either assigns no liability at all to the platform (and hence all liability on the seller), or it assigns to the platform the largest liability share for which the platform would choose a price that induces the seller to provide high product safety. Gerd Muehlheusser is a Professor of Economics at the University of Hamburg, Germany and a member of the Swiss Competition Commission. He is the managing editor of the Journal of Institutional and Theoretical Economics, and his research has appeared in Journal of Law, Economics, and Organization, RAND Journal of Economics, Games and Economic Behavior, and Journal of Legal Studies. Moderator: Benjamin Chen, Associate Professor & Director of Law and Technology Centre, The University of Hong Kong Faculty of Law