The (Negative) Value of Safety Testing Precision Under Product Liability

We analyze how the precision of a firm’s product safety testing affects its pricing strategies and the associated profit implications under strict product liability with a partial liability specification. We consider a signaling game where a firm with private product safety information chooses a price to sell its product. Focusing on separating equilibrium satisfying the intuitive criterion, we show that the precision of the private safety information has a U-shaped impact on the firm’s ex ante expected profit when the firm bears a relatively large portion of liability losses from unsafe products. Hence, a more precise product safety testing technology is not necessarily more valuable for the firm