Corporate social responsibility: a strategic and profitable response to entry?

Abstract

This paper investigates whether an incumbent has an incentive to introduce corporate social responsibility (CSR) activities only as a response to entry by a competitor, i.e., the incumbent would eschew CSR if left uncontested. We assume that the entrant cannot provide CSR at least at the outset for two reasons: (1) it would not be credible due to its lack of recognition and (2) due to high fixed cost to pay e.g., for licensing. More precisely, this paper shows that monopolistic firms can have indeed the incentive to introduce CSR activities only as a response to entry. Therefore, increased competition can turn a firm “green”, providing a “win–win” for business as well as for the environment.

Appendix

1.1 Proof of Proposition 1

It suffices to show that the profit of the monopolist when engaging in CSR activities $\pi ^s$ is smaller than the profit eschewing CSR even if the monopolist could charge a price $\hat{p}^s > 1 \Longleftrightarrow c > 1 - \overline{\theta }$. Calculating the threshold levels from

$$\begin{aligned} \pi ^s = \frac{(1 - c + \overline{\theta })^2}{4 \overline{\theta }} - \varphi = 1 = \pi ^0, \end{aligned}$$

for the critical cost parameter yields two roots

$$\begin{aligned} c^m_i = 1 + \overline{\theta } \pm 2\sqrt{(1 + \varphi )\overline{\theta }}. \end{aligned}$$

Note that $c^m_1 > 1 + \overline{\theta }$ and therefore this root is dominated by the necessary condition $c < 1 + \overline{\theta }$. It follows that the monopoly engages in CSR activities if $0 < c < c_2^m = c^m, \forall \overline{\theta }^m > 1 + 2 \varphi + 2 \sqrt{(1 + \varphi ) \varphi }$, and eschews CSR activities if $1 + \overline{\theta } > c > \max {\ \left\{ 1 - \overline{\theta }, c^m \right\} }.$

Analogously, the condition for the maximum willingness to pay can be derived. $\square$

1.2 Proof of Proposition 2

It suffices to show that the profit of the incumbent when engaging in CSR activities $\pi ^i$ is larger than the profit of the incumbent deterring entry by limit pricing $\pi ^k$. Furthermore, eschewing CSR in the uncontested monopoly is necessary, otherwise the introduction of CSR as a strategy would be obsolete anyway. Calculating the threshold levels from

$$\begin{aligned} \pi ^i = \frac{(2\overline{\theta } - c + k)^2}{9\overline{\theta }} - \varphi = k = \pi ^{k}, \end{aligned}$$

for the critical cost parameter yields two roots

$$\begin{aligned} c_i = 2\overline{\theta } + k \pm 3\sqrt{\overline{\theta } (k + \varphi )}. \end{aligned}$$

Note that $2\overline{\theta } + k < c_1, \forall k > 0$, therefore this root can be ignored. It follows that CSR is a profitable strategy to entry if $c^m < c < c_2 = \overline{c}$.

Analogously, the condition for the maximum willingness to pay can be derived. $\square$

1.3 Example

Figure 4 depicts the corresponding sales and prices from the example discussed in Sect. 2.2. In particular panel b, the one about prices shows that the entrant hits the upper price limit for very high costs, $c = 1.8$, of CSR thus $p^{e} = 1$ and $p^{i} = \hat{p}^{s}$ for $c > 1.8$, without covering all sales.

Fig. 4

Strategies vs CSR costs ($k = 0.1, \varphi = 0.1, \overline{\theta } = 1$)