“Product Liability and Game Theory: One More Trip to the Choice-of Law Well” by Michael Krauss applies many of the issues addressed in class to product liability law. The original article is found in the Brigham Young University Law Review and the link is at the bottom of the page. The article addresses many aspects of laws, rules, and judicial interpretations. Hopefully this analysis sparks some interest; though the article is long, it really expounds upon the topics of the class and applies them in a novel manner. The main issue of the article is that of the Prisoner’s Dilemma. As we learned in class, the prisoner’s dilemma results when each individuals rent seeking behavior leads to a “Pareto Inferior” outcome for the whole. This is exactly what occurs in the field of product liability law and adjudication. Here’s a quick background on product liability law. There is no federal product liability law; therefore in attempt to maximize surplus for their home territory, states will select a product liability law that favors plaintiffs rather than manufacturers. This “beggar-thy-neighbor” approach was not prevalent in the past when product liability cases would include a hometown plaintiff and a hometown defendant. However, now that many products are purchased from different states and even different nations, the incentive of opportunistic behavior increases greatly. The state will enact a law that to predominantly pro-plaintiff to bring money into the home state at the expense of an alien manufacturer. Such a legal regime would not be an issue is the product in question was poorly made. The manufacturer would have to “eat” the cost of the poorly made product and either improve the product or exit the industry. The manufacturer could not raise prices in a competitive industry because consumers would just purchase the other products of the competitors. This aside highlights the necessity of competition to obtain a social optimum as shown in the trader’s network discussed in chapter 8. Now, the problem arises when products all already optimally made. Manufacturers will have to add costly and unnecessary safety features that will raise the price for all products offered in that industry. The key here is that the increase in price is not borne solely by the state with the Pareto inferior product liability law. It is borne by all persons in the United States. This fact leads to the retaliatory nature discovered in the constant iteration repeat prisoner’s dilemma. Firstly, we can construct a payoff matrix to conclude that the best response for any judge to choose a plaintiff-friendly product liability law and therefore the welfare-reducing legal regime is a dominant strategy. Krauss asks us to consider two states A and B. He demonstrates that no matter what B’s product liability rule is, A’s best response is to have a pro-plaintiff product liability rule rather than a neutral rule. Furthermore, he states that B’s best response is in choose a pro-plaintiff product liability rule no matter what A’s action is. Therefore, both have a dominant strategy of pro-plaintiff and the Pareto inferior result in the bottom right of the matrix will occur. Social welfare will be reduced.

A

B Neutral Pro-plaintiff

Neutral 40,40 -10,55

Pro-plaintiff 55,-10 5,5

The application of the prisoner’s dilemma in this context is also reminiscent of Braes Paradox. The road network example in class showed that when individuals attempt to maximize their own surplus in a network dependent on others, an external cost will be created for the whole. In class, each individual wanted to use that shortened road because he or she wanted to reduce his or her own travel time. However, by doing so each driver created a congestion externality imposing a higher cost for the system as a whole. In regards to product liability cases, each judge and state in pursuing their own state’s interests pass the cost on to consumers as a whole in higher product costs or even the loss of products that would be introduced into the market if product liability risks and payouts were not so high. The latter reduction to welfare is currently seen in the drug market for AIDS and HIV medications. The prisoner’s dilemma of product liability is exacerbated because judges are fully cognizant of other judges’ rulings, interpretations, and the externalizations of the costs of those interpretations. The reasoning is along the lines of: “Well if my state residents have to bear the costs of your inefficient legal rule, your residents should bear the cost of my equally inefficient legal rule” (my quote not from the article). The article more thoroughly dissects the subtleties of this prisoner’s dilemma and some questions that might be lingering in your mind such as: why would producers just not locate in pro-producer states thus taking away the some of the incentives for pro-plaintiff legislation? Much of the answer to this question lies in the fact that most product liability law is governed by a rule of Lex loci delictus (that the state’s law that the injury actually occurred governs product liability suits) as well as an interest doctrine by which states can interject their own law if they have a “compelling” interest. Beyond the investigation of the prisoner’s dilemma of product liability, the article addresses possible solutions and avers that a federal regulation of a choice of law rule would result in the Pareto Superior solution. Krauss considers various choice of law rules and concludes that the “Law of first retail sale” is the most efficient rule. This rule says that the product liability law that will prevail will be the one of the state where the good was purchased. As discussed by the article, this internalizes much of the costs of inefficient product liability laws on the states that introduce them. Furthermore, the article discusses that this law brings in a competitive element from the retail sector found lacking in other legal regimes. Though Krauss does introduce a strong caveat to this law: product liability cases for third parties of products purchased in another state, the reform’s strengths outweigh this weakness. The first retail sale rule allows competition among tort laws and as Krauss asserts “allows a state’s product liability and general tort rules to ‘network’ as they should (pg. 25).”

http://www.lexisnexis.com/us/lnacademic/search/homesubmitForm.do

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