Uncertainty of food contamination origin and liability rules: Implications for bargaining power

We propose an industrial organization model to analyze the role of bargaining power and liability rules in creating incentives for downstream and upstream supply chain operators to invest in good practices. We investigate the case in which either upstream production practices or downstream distribution may cause product contamination resulting in noncompliance with the authorized thresholds of residues (maximum residue limit [MRL]). We provide a comparative analysis of the retailers’ liability rule‐based accountability and the liability rule “polluter pays,” which penalizes an operator who is directly responsible for a noncompliant product. We show that choosing the optimal liability rule is a complex problem, as the choice depends on the effectiveness of food safety controls and on the magnitude of the fine associated with rejecting noncompliant products. Moreover, the choice of the liability rule can change the negotiating power of both operators and, according to the rule chosen, the retailer will have to pay a higher or lower input price.