Social Responsibility in a Bilateral Monopoly with Downstream Convex Technology

Abstract

This paper shows that, in a bilateral monopoly with consumer-friendly social concerns, only the downstream firm is always incentivized to adopt corporate social responsibility (CSR) if it has decreasing returns to the input, leading to a Pareto-superior outcome in equilibrium. This occurrence differs from a standard linear bilateral monopoly in which, if the upstream (downstream) firm commits itself to CSR before the downstream (upstream) does, then both firms improve profits, while they do not deviate from pure profit-maximization if CSR levels are simultaneously chosen. Straightforward policy and empirical implications are offered, and this paper argues that the presence of CSR-type firms crucially depends on technology.