Platform Liability and Innovation

ABSTRACT We study a platform's incentives to remove IP‐infringing products and the effects of holding the platform liable for such infringements on innovation and welfare. We first show that platform liability can lead to either higher or lower commission rates, depending on how screening affects transaction volume. We then show that liability may spur or hinder innovation, depending on the intensity of cross‐group network externalities, which determines participation elasticities on each side. If platform liability lowers innovation, all market participants—the platform, innovators, imitators, and buyers—are worse off. We also provide a sufficient condition for platform liability to raise welfare.