Social Responsibility in a Bilateral Monopoly

Abstract

We work on a linear bilateral monopoly to analyze the effects of firms' social concern. Both firms in the market, the up-stream manufacturer and the down-stream retailer, can be socially concerned. Firm's social concern is modeled through a broader firm objective. In addition to their profit both firms also care about a share of consumer surplus. In our two stage game, at first the manufacturer fixes the wholesale price per quantity, which has to be paid by the retailer.Subsequently, the retailer chooses the optimal quantity. The results show that firm's social concern increases firm profit for the manufacturer as well as the retailer's profit. Moreover, the firms' broader objective function softens the classical double marginalization problem, because in equilibrium all market participants, consumers included, are better off compared to a bilateral monopoly with two pure profit-maximizing firms. Therefore, firms' social responsibility results in a Pareto improvement.