Consumer Protection and Product Safety Quality under Market Competition

This paper investigates economic outcomes that occurred when firms facing oligopolistic competition sell potentially risky products. I show that a high safety quality firm can earn greater profits when there are substantial safety quality differences among competitors, because the firm with high product safety quality gains a greater demand for its products. By raising the safety quality, the high-safety firm is able to dominate the market and earn greater profits than the low-safety firm. The profitability of the low-safety firm becomes substantially lower because it loses its market share, even though it reduces its safety level to avoid severe price competition. As a result, the market becomes monopolized and consumer welfare decreases when there is no regulation for product safety. Therefore, the existence of potentially risky products in a market justifies governmental regulation to protect consumers and improve their welfare. The regulation must improve safety in the use of products, and also improve competition through antitrust measures.