Corporate social responsibility strategies in competition and their implications

Abstract

Corporate social responsibility (CSR) is very important for society, and the public now monitors firms’ CSR strategies. In this paper, we develop a game-theoretical model with two firms engaged in Cournot competition to investigate their incentives for CSR operations and how such incentives are contingent on exposure probability, demand sensitivity and the cost premium. We find that high violation exposure risk (which is proportional to both exposure probability and demand sensitivity) drives firms to exert more CSR effort, while a high cost premium discourages them from doing so. We also study how competition impacts firms’ CSR strategy. In particular, in a special case where firms can choose either CSR or non-CSR strategies, we find that mandatory requirements on firms’ CSR strategy may lead to win–win or lose–lose situations. Moreover, we extend our model to the case in which the product price is impacted by customer demand and the case in which firms additionally produce to capture shifted demand. Our findings have practical implications for policymakers to promote CSR operations. They can take various actions to encourage firms to exert more CSR effort and should further quantify firms’ effort levels. In addition, policymakers must be careful in promoting CSR operations, as mandatory requirements on firms’ CSR operations serve as a double-edged sword.