The Socially Responsible Choice in a Duopolistic Market: A Dynamic Model of 'Ethical Product' Differentiation

Abstract

The increasing attention of prot maximising corporations to corporate social responsibility (CSR) is a new stylized fact of the contemporary economic environment. In our theoretical analysis we model CSR adoption as the optimal response of a prot maximising rm to the competition of a not for prot corporate pioneer in presence of a continuum of consumers with heterogeneous preferences toward the social and environmental features of the nal good. CSR adoption implies a trade-o since, on the one side, it raises production costs but, on the other side, it leads to the accumulation of ethical capital. We investigate conditions under which the prot maximising rm switches from price to price and CSR competition by comparing monopoly and duopoly equilibria and their consequences on aggregate social responsibility and consumers welfare. Our ndings provide a theoretical background for competition between prot maximising incumbents and not for prot entrants in markets such as fair trade, organic food, ethical banking and ethical nance.

Market competition and ethical standards: the case of fair trade mainstreaming

“…In the remainder of this section we consider these outcomes for each of the historical phases of FT mainstreaming. We assume perfect information: consumers have correct perceptions regarding the firms' wealth transfers and their own psychological distance costs (Becchetti et al 2014); firms have correct perceptions regarding consumers' willingness to pay V. We denote total wealth transfers by S and the conventional and FT firm's wealth transfers by S ct and S ft respectively. To minimize mathematical notation all derivations have been relegated to the Appendix.…”

“…Consider first a market for homogeneous products, where consumers are no longer able to distinguish FT products on fairness. Absent any other features differentiating both products, Bertrand competition occurs and prices decrease until profits are zero (Davenport 2005, Becchetti et al 2014. Consumer welfare goes up at the expense of smallholders, who do not receive wealth transfers anymore.…”

Business ethics and corporate social responsibility

“…Becchetti, Palestini, Solferino, and Tessitore () consider a horizontal differentiation model where a profit maximizing monopolist sells a good to a continuum of consumers with inelastic unit demands who are uniformly distributed across the line segment [0,1] according to their concerns for corporate responsibility. Different locations in the consumers' interval imply differences in the psychological perception of the ethical value of the good and not in physical distances or tastes.…”

A Dynamic Model of Gambling Addiction with Social Costs: Theory and Policy Solutions

“…According to Farrelly et al [20] having a 100% smoke-free workplace would reduce smoking prevalence by 6% points and average daily consumption among smokers by 14% relative to workers subject to minimal or no restrictions. Fichtenberg and Glantz [21] compare the effects of restriction policies with those of an increase in excise taxes and find that smoke-free workplaces not only protect non-smokers from the dangers of passive smoking, but also reduce consumption in more significant proportion. To obtain the same effect sigarette taxation should increase by 300%.…”

“…In essence, the bottom up action of the public opinion may modify the government perception of the parameter θ, thereby a ecting its trade-o and leading to a stronger enhagement of the latter against gambling. There are several works [21] [22] showing how a small share of consumer choices affected by social and environmental concerns significantly influence the behaviour of profit maximizing firms whose economic and financial success depend on small changes in market shares, revenues and pro ts. Institutions are nonetheless affected as politicians try to represent issues of these groups not to lose their political support.…”