Platform Liability with Relational Sanctions

Fernando Gomez (Pompeu Fabra Barcelona)

Abstract

This paper presents a framework where sellers, an online platform with monopoly
power, and consumers transact. We aim to study the interaction between the imposition
of liability on the platform, the reputational sanctions exerted by consumers,
and the internal measures adopted by the platform to keep in check the sellers,
whenever a product generates losses to consumers. We show that introducing direct
legal liability of the platform may have both positive and negative effects for safety investments. Additionally, when sellers are heterogeneous (with respect to their
sensitivity to the sanctions from consumers or from the platform), legal liability on
the platform will have an impact on the selection of participating sellers, although
the sign and size of the effect largely depend on paremeter values.

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