Firm response to ethically motivated boycotts

Abstract

We develop an asymmetrically two-sided location model to investigate how firms react to ethically motivated boycotts. We model ethicality as a continuous spectrum between zero (no ethicality) and one (absolute ethicality). Customers are assumed to be distributed such that their density decreases the higher they are in the ethical spectrum. Boycotting is used as a strategic tool, and customers will boycott only if this increases their total utility, which comprises a positive utility from consumption and a disutiity from doing business with an unethical firm. We study the optimal location of a monopolist and compare it with the central planner’s optimal location. The analysis characterizes the threshold ratio of ethically concerned to ethically indifferent customers above which the monopoly or the central planner will (partially) yield to boycott threats. Furthermore, the monopolist will always locate below the social optimum. We describe when the difference between the two are the greatest, implying conditions about when government intervention may be beneficial. In a market with multiple firms we show that if consumers engage in buycotting in addition to boycotting then there is no pure strategy equilibrium outcome. Absent buycotting, however, equilibrium is demonstrated when customer disutility is sufficiently high. The numerical illustration demonstrates that the monopolist will locate above the average customer only if the customer disutility is sufficiently high.