Product liability influences incentives for horizontal mergers

Abstract

This paper explores how product liability rules affect merger incentives, with consumer risk perception as a key factor. We find a striking contrast: when consumers overestimate product risk, no liability generates the strongest merger incentives, while strict liability and negligence have weaker, similar effects. Conversely, when consumers underestimate risk, strict liability maximizes merger incentives, and no liability minimizes them. We also demonstrate that horizontal mergers without efficiency effects can unexpectedly increase welfare under no liability or negligence when consumers underestimate risk—a result that is impossible under strict liability.