Tacit collusion and liability rules

This paper demonstrates that the likelihood of tacit collusion in a given oligopolistic industry may depend on the kind of liability rule applied to the industry. We study typical settings for the analysis of product liability and environmental liability. For the latter, it is established that tacit collusion is more likely under strict liability than under negligence. However, the two liability rules are equivalent with regard to their effects on tacit collusion in the model pertaining to product liability. This context-dependent impact on tacit collusion can be traced back to a difference in the shape of firms’ cost functions.