Corporate social responsibility in a supply chain and competition from a vertically integrated firm

Abstract

This paper extends the analysis of the effects of corporate social responsibility in a bilateral monopoly to the case where a manufacturer and a retailer engaged in a supply chain face competition from a vertically integrated firm. The paper finds that when the manufacturer and the retailer non-cooperatively select their degrees of social concern, they choose to pursue pure profit maximization, irrespective of the order in which they make their choices. These choices put them at a disadvantage with respect to their vertically integrated competitor, who produces more output than they do and obtains higher profits than their joint profits. The paper then shows that when they cooperatively choose their degrees of social concern, they both choose positive degrees of social concern and, therefore, deviate from pure profit maximization. These choices give them a competitive edge over their vertically integrated rival: they produce a higher output and obtain higher joint profits than their competitor. In comparison with the non-cooperative outcome, the positive degrees of social concern cooperatively chosen by the manufacturer and the retailer imply higher output and profits for the retailer and the manufacturer and lower output and profits for their competitor. They also imply lower prices and higher consumer surplus and social welfare.