A Note on Multiple Equilibria and Punitive Damages Rules in “everybody Out of the Pool”
| DOI | 10.1093/jleo/14.2.379 |
| Copyright note | © 1998 Oxford University Press |
| Pages | 379-387 |
| Date | 01 October 1998 |
| Year | 1998 |
| Published By | Oxford University Press |
JLEO.V14N2 379
A Note on Multiple Equilibria and Punitive Damages
Rules in "Everybody Out of the Pool"
Andrew
F.
Daughety
Vanderbilt University
Jennifer
F.
Reinganum
Vanderbilt University
This article describes two types of revealing equilibria in the presence of punitive
damages meant to encourage truthful revelation of the safety of a product. Full
information price (FIP) revealing equilibria occur when the equilibrium prices are
those that would obtain under full information. Full information quantity (FIQ)
revealing equilibria occur when the equilibrium quantities are those that would
obtain under full information. We discuss the punitive damages policies which
support each type of equilibrium and argue that FIP revealing equilibria are likely
to be of greater interest.
In a recent article in this journal (Daughety and Reinganum, 1997), we devel-
oped a model in which the safety of a product was unobservable to consumers
prior to its purchase and use. The model involved a monopoly seller of the
product, for which there were two potential levels of safety. Safety, an ex-
ogenous attribute of the product, was measured by the probability of harm to
the consumer. We showed that, without punitive damages, a revealing equi-
librium existed when the difference in the product safety levels was not too
great; that is, consumers could infer safety from observing the price charged
in the market. This revealing equilibrium involved each product type charging
its full information price; skeptical consumers responded to the low price by
buying for sure, but not buying for sure at the high price;1 in the sequel, we
refer to such an equilibrium as a "full information price" (or FIP) revealing
equilibrium. We then asked whether such an equilibrium extended to the case
in which the safety levels were significantly different and found that no FIP
revealing equilibria existed under those circumstances. However, by employ-
ing a particular level of punitive damages in the event that a less-safe product
misrepresented itself
as
a safer product, the FIP revealing equilibrium could be
extended to all potential safety levels for the two product types. Assuming that
1.
As usual, with a mixed strategy equilibrium we could also interpret this outcome as all
consumers buy at the low price, while a fraction of consumers buy at the high price.
© 1998 Oxford University Press
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