Seller liability versus platform liability: optimal liability rule and law enforcement in the platform economy

In this paper, we examine whether the platform as well as the sellers violating the intellectual property right (IPR) should be liable. We first show that platform liability is socially better if the number of potential victims is very large. This is mainly due to the general enforcement effect of the platform’s monitoring activity. In the case of specific enforcement in which each patent or trademark holder selling legitimate products tries to detect only the IP violations of its own brand, the monitoring activity of each seller has no spill-over effect, so that the deterrence effect of its monitoring activity remains the same regardless of the number of patent holders. However, in the case of general enforcement in which the platform monitors the possibility of any IP infringement including all legitimate products on the platform, the deterrence effect of its monitoring activity exceeds the monitoring cost if the number of patent holders is large. Then, in a simple model of two sellers without general enforcement effect, we show that under seller liability, awarding punitive damages with punitive multiplier equal to the reciprocal of the enforcement probability induces social optimum in which infringing entry occurs if and only if it is efficient, while platform liability may not induce social optimum.