Market entry and product liability

Cournot competition with fixed entry costs can lead to excessive market entry. We examine how product liability regimes influence firm entry decisions within a framework where consumers may misperceive product risk. We demonstrate that market entry can be insufficient when consumers overestimate product risk and are not fully compensated for their losses. Furthermore, our analysis reveals that endogenous entry eliminates the “output effect,” a mechanism commonly invoked in models with a fixed number of firms to establish that a no-liability regime can be socially optimal. Our findings suggest that Strict Liability with full compensation for consumer losses is socially optimal in Cournot markets with endogenous entry. • We study a Cournot model where consumers may over- or underestimate product risk. • We show that market entry can be insufficient when consumers overestimate product risk. • In contrast, market entry is excessive when consumers underestimate product risk. • Endogenous entry makes strict liability with full compensation dominate no liability.