Xinyu Hua & Kathryn E. Spier, Platform Safety: Strict Liability versus Negligence (March 31, 2023).
Abstract: This paper explores whether platform liability should be strict or negligence based. In the model, two-sided platforms get revenue from two sources: selling products or services to consumers and selling advertising (or information) to others. There are indirect network effects: higher consumer participation generates more revenue from advertising or data sales. Platforms may take costly and unobservable precautions to reduce risks of consumer harm. If network effects are weak (strong), the price charged to consumers is positive (zero). If the consumers’ price is positive, then both strict liability and negligence lead to efficient precautions and consumer participation. If the price is zero, then strict liability stimulates more user participation and higher social welfare than the negligence rule. Bilateral care (i.e., consumer precautions), third parties (e.g., government agencies, lawyers), and platform market power are also examined.