Abstract
Using a simple Cournot duopoly model with differentiated products, this work studies the firms’ strategic choice of whether to adopt Corporate Social Responsibility (CSR) rules. The proposed game-theoretic approach shows that, depending on the degree of product differentiation and firms’ social concern, different equilibria arise: (1) all firms in the industry follow CSR rules, (2) all firms are profit-maximising (PM), (3) asymmetric equilibria are present (one CSR firm, one PM firm), and (4) multiple symmetric equilibria are present. Under Bertrand competition, universal PM is the unique equilibrium in which the social welfare is the least desirable: this implies that, in contrast to the conventional wisdom, Bertrand may appear as welfare dominated by Cournot. This work can help to explain the widely observed phenomenon, in the real world, of different industries in which firms’ CSR behaviours are more or less commonly widespread.
Highlights
The increasing presence of firms adopting Corporate Social Responsibility (CSR) behaviours has been observed worldwide
Under Bertrand competition, universal PM is the unique equilibrium in which the social welfare is the least desirable: this implies that, in contrast to the conventional wisdom, Bertrand may appear as welfare dominated by Cournot
Making use of a simple Cournot duopoly model with identical firms and differentiated products, we show that the strategic nature of the adoption of CSR rules may explain the occurrence in the equilibrium of situations in which (1) both firms follows CSR rules, (2) both firms do not follow CSR rules, (3) asymmetric equilibria in which one firm adopts CSR while the rival does not, and (4) multiple symmetric equilibria in which both firms may decide whether to adopt CSR, depending on the degree of product differentiation
Summary
The increasing presence of firms adopting Corporate Social Responsibility (CSR) behaviours has been observed worldwide. In the presence of complement goods, the reaction functions become upward sloping, and goods behave as when strategic complements In both cases, the increasing weight attached to the stakeholder-consumers’ interests leads the socially concerned firms to an aggressive market behaviour via output expansion, which is stronger with substitute than with complement products. Under Bertrand competition, with substitute goods, the reaction functions are upward sloping (strategic complements), while with complement goods, the reaction functions become downward sloping, and goods behave as when strategic substitutes In these cases, an increase of the social concern level yields aggressive product market behaviour of the CSR firm through a price reduction, which is more intense with complements than substitute products.
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