Environmental Corporate Social Responsibilities in Differentiated Duopoly: A Welfare Analysis

Abstract

The well-known result that price rather than quantity competition delivers a higher amount of output and consequently higher social welfare may not hold in a polluting industry. This paper examines firms' incentives for undertaking strategic ECSR activities under quantity and price competition, respectively. Compared to the equilibrium outcome under price competition, we find that the firms produce fewer outputs, charge higher prices, invest more in ECSR activities, and discharge less emission under quantity competition. In other words, while a higher output level increases consumer surplus, a lower level of ECSR investment intensifies environmental damage. Due to the trade-off between consumer surplus and environmental damage, social welfare is higher under quantity competition if the marginal environmental damage is too large.