Legal Policies on Platform Liability: An Economic Approach

In today's digital age, online platforms like Amazon or Airbnb have become integral to our daily lives, connecting consumers with a myriad of third-party sellers or providers. But what happens when something goes wrong with a product purchased through these platforms? This question lies at the heart of our new papers (here and here). The paper delves into the evolving legal landscape surrounding platform liability, focusing on the economic implications of holding online platforms accountable for harm arising from goods and services acquired by consumers from third-party sellers.

The Problem

Our setup of interest is epitomized by the already notorious case Oberdorf v. Amazon. Ms. Heather Oberdorf purchased a dog collar from a third-party seller on Amazon and, tragically, the collar malfunctioned, causing Heather to lose sight in one eye. Around the world, millions of (e)consumers who rely on online platforms for their purchases from third-party sellers or service providers may be disappointed after some time with the quality of what they get or could even get harmed.

The Debate

In the US there is abundant case law, dominated by divergent approaches and outcomes. For instance, in Oberdorf v. Amazon, the court ruled that Amazon could be considered a ‘seller’ and thus liable for the defective product. Conversely, in McMillan v. Amazon, the court found that Amazon was not a ‘seller’ under Texas law and thus not liable.

Across the Atlantic, already in 2019, and partly building upon the US decisions that found platforms liable, the European Law Institute’s Model Rules advocated that platforms exercising ‘predominant influence’ over sellers should bear the same liability as the sellers themselves. EU legislation has touched upon platform liability, albeit without a comprehensive set of solutions. The 2024 Product Liability Directive makes platforms liable when acting as fulfilment service providers—ie, any person offering, in the course of commercial activity, at least two of the following services: warehousing, packaging, addressing and dispatching, excluding postal services and freight transport services—on a subsidiary basis, for harm caused by defective products sold through them when the manufacturer, importer or authorised representative cannot be traced inside the EU. Many commentators in Europe believe this is too timid a response to the underlying problem.

An Economic Model of Platform Liability

To dig somewhat deeper into the consequences of imposing platform liability, we present a theoretical model to assess the impact of platform liability on seller’s behaviour, consumer welfare, and market efficiency. The model envisions a monopolistic platform allowing one seller per product category, with sellers deciding whether to invest in product safety. The findings suggest that increased platform liability can enhance consumer welfare by providing compensation to them and savings in costly reputational sanctions. However, it may also reduce sellers' incentives to invest in product safety, particularly for low-value goods.

A key aspect of the model is the ability of both consumers and the platform to incur costs to sanction other parties when a product turns out to be harmful or defective. Since consumers interact with sellers only through the platform, it serves as the initial target of accountability for consumers (reducing transactions, or writing negative reviews when harm occurs and no compensation is provided). The platform, in turn, can impose internal penalties on sellers (reducing visibility in the platform, delisting). These punishments illustrate how both consumers and the platform can respond to defective products being sold on the platform, influencing the future payoffs of other participants in the overall interaction.

When goods or services have relatively low value, the model shows that consumer sanctions may reduce the platform’s incentive to encourage seller investments. Since transactions only occur if the goods are safe, there is no need for consumers to impose reputational sanctions to prompt the platform to internally penalize sellers when their goods turn out to be defective. This is so because without sellers' safety investment, there will be no trade, and thus the platform, regardless of consumer’s reputational punishments is interested for that reason in inducing investment by seller. However, since such inducement is costly for the platform, and legal liability reduces the platform’s profits, increasing this liability may lead the platform to forego certain transactions that are socially beneficial because goods are safe—but not accident-free—but are not profitable to the platform due to the payment of compensation to consumers.

For high-value goods, the model suggests that increased platform liability can lead to better safety outcomes. However, as the level of platform liability increases, consumers’ desire to impose sanctions decreases because they receive compensation from the platform. This reduction in consumer sanctions lowers social costs but also increases the likelihood of harmful goods, as sellers have less incentive to invest in safety.

Two important qualifications need to be made. When defects appear shortly after delivery and there are few consequences other than the lower functionality or value of the good, typically compensation to buyers, although operated through the platform, is in fact funded by the sellers, because platforms who control the payment process do not transfer the purchase price—minus the platform fee—to sellers immediately, but after a period of time has elapsed.

Second, when compensating consumers entails no litigation or administrative costs, even when safety incentives decrease, social welfare increases. This result is explained by the fact that if consumers are effectively compensated when harm arises, they would rather prefer not to punish the platform and buy a relatively lower-quality product than obtaining a relatively higher-quality product but bear the costs of sanctioning when they suffer damage. In reality compensation is costly to administer.

Conclusion

The paper concludes that a nuanced policy approach is needed to balance consumer protection with the innovative and competitive dynamics of digital marketplaces. We advocate for platform subsidiary liability for significant harm and extended return policies for non-conformities and minor instances of harm. When legal liability is low, consumers use reputational sanctions to motivate platforms to discipline under-performing sellers. However, as legal liability increases, consumers' incentives to use reputational sanctions decrease, potentially lowering product safety and overall welfare. Extending liability periods for minor harms can protect consumers without harming reputational incentives, while a subsidiary liability regime for severe harms provides compensation to consumers and reinforce platform’s incentives to encourage sellers’ safety efforts. This approach ensures better consumer protection while preserving the incentives for both platforms and sellers to maintain high safety and quality standards.

By carefully calibrating liability rules, policymakers can enhance consumer trust and welfare while supporting the continued growth and dynamism of the digital economy. This approach ensures that platforms remain vigilant in their oversight responsibilities, sellers are motivated to maintain high safety and quality standards, and consumers are protected from harm.

Alessandro De Chiara is Associate Professor (with tenure) at the Department of Economics of the Universitat de Barcelona.

Juan José Ganuza is Professor of Economics and Business at Universitat Pompeu Fabra and at the Barcelona School of Economics.

Fernando Gómez Pomar  is Professor of Private Law at Universitat Pompeu Fabra.

Ester Manna is Associate Professor of Economics (with tenure) at the Department of Economics of the Universitat de Barcelona.

Adrián Segura Moreiras is Part-time Lecturer at the Department of Economics and Business of the Universitat Pompeu Fabra.

The papers are available here and here.