Market Share Liability and Economic Efficiency

Abstract

In recent history, the trend in U.S. liability law has been to shift the burden of products liability from the consumer to the producer, with strict (producer) liability being the extreme case. One of the key economic rationales for the use of strict liability as opposed to the rules of no liability or negligence is that producers have knowledge of the riskiness of their products, while buyers do not have this knowledge. Given this information asymmetry, strict liability achieves economic efficiency, while the use of no liability or negligence will result in inefficiency. The crux of this well-known argument is that with strict liability producers are able to correctly internalize expected liability expenses to their costs, while buyers can not correctly internalize these costs to their willingness to pay.' Let us call this information problem the product evaluation problem. Imagine now a second type of information problem where in addition to the lack of ability to evaluate the riskiness of a product, buyers (and sellers) are unable to identify ex post the particular producer of the product causing harm. There are a number of instances in which the producer identification problem is present. One example is provided by the case where a consumer uses a variety of generically similar drugs produced by many different producers. A similar example is provided by the case of a carcinogenic food additive entering many different foods produced by multiple producers. A third set of examples concerns products doing harm through exposure rather than ingestion. A single individual may come into contact with several different brands of asbestos, each brand containing the same fibers harmful to the lungs. Likewise, an individual may be exposed to several different brands of pesticides or herbicides each containing the same harmful chemical compound. In all of these cases, it is possible that the victim of harm would know the type of product doing damage but not the specific producer(s) of the product(s). In fact, for many of these cases, it is unreasonable to expect the consumer to be able to identify the producer causing harm. While strict liability provides a solution to the product evaluation problem, it can not similarly perform in the case of the producer identification problem. A fairly recent California Supreme Court case, Sindel versus Abbott Laboratories [7], has used market shares to apportion the total damages among firms as a remedy for what we call