Incentives to differentiate under environmental liability laws : Product customization and precautionary effort

Eric Langlais (1) , Andreea Cosnita-Langlais (1)

1 EconomiX - EconomiX

We endogenize location/product specification choices in a spatial Cournot duopoly on the linear market, when firms' output entails an accidental harm to the environment. Under a strict liability regime, the equilibrium involves no differentiation when the expected harm is low enough. This outcome is suboptimal, and identical to the spatial pattern obtained under a no-liability regime. With larger harm, the equilibrium displays some dispersion/product differentiation, the degree of which is increasing with the level of harm towards the first best locations/product choices. Our results are robusts when allowing for firms' investment in environmental measures. Moreover, we show that vertical/care differentiation occurs whenever horizontal product differentiation arises. Finally, we show that under a negligence rule, firms always comply with the due care level, but the equilibrium involves no differentiation, either horizontal/product or vertical/care.

Keywords: Cournot competition, spatial model, strategic location, product choice, horizontal differentiation, vertical differentitation, environmental liability, strict liability, negligence.

Domains: Economics and Finance

Eric Langlais, Andreea Cosnita-Langlais. Incentives to differentiate under environmental liability laws : Product customization and precautionary effort. 2022. ⟨hal-04159799⟩