Platform Liability, Product Safety and Optimal Pricing

Abstract

Should platforms be held legally responsible for harm caused by products or services offered by third-party sellers? We address this question in a novel setting in which product safety (the likelihood of accidents) is determined by third-party sellers, while the consumer price is set by a monopolistic platform that pays sellers a commission. Relevant examples include platforms providing ride-hailing services (e.g. Uber and Lyft) or health care services (e.g. Teladoc). Sellers decide whether or not to become active on the platform, and consumers' willingness to pay for the platform good increases with the number of active sellers (platform externality). When an accident occurs, the harm is divided between the platform and the respective seller according to a liability rule set ex ante by a welfare-maximizing policymaker. Sellers' incentive to provide high product safety is driven by market demand, which in turn is determined by the platform's pricing scheme, balancing the trade-off between market revenue and expected liability costs. The platform may optimally set a price below the monopoly level to boost demand, thereby triggering active sellers to provide high product safety (market channel). The socially optimal liability rule is dichotomous: it either assigns no liability to the platform, or the maximum liability share for which the platform exploits the market channel to induce high product safety from the sellers. Holding the platform liable is socially desirable only when it induces lower consumer prices.