The impact of Corporate Social Responsibility (CSR) for a firm’s competitive position has gained greater significance in the past ten years (e.g. KPMG, 2011; Ernst & Young, 2011;
Economist Intelligence Unit, 2007)). Firms have explored possibilities for CSR activities to gain a competitive advantage, to choose a strategic level of CSR (e.g. Baron, 2001;
McWilliams and Siegel, 2001, 2011; Fernandez-Kranz and Santalo, 2010). Due to media coverage of the social efforts (Zyglidopoulos et al., 2012), the public perception of CSR has increased as well. In addition to the discussion in the scientific literature, CSR is debated in practice as well. For example,The Economist has published lengthy special reports on CSR in January 2005 and January 2008. Practitioners link CSR to the ”honorable merchant” who wants ”long-term economic success without harming the interests of the society”. Accord-ingly, firms do not act honorable due to moral or altruism but to”be in business tomorrow”
(Dercks (2013), p. 6). As a result, firms have to take CSR into account to generate long-term profits. Therefore, we try to answer questions about long-run profitability. First, can a socially responsible firm outperform a non-social competitor? Second, can social behavior be a dominant strategy?
In spite of extensive discussions about corporate social responsibility (CSR) and the rising 36
interest from firms, consumers and stakeholders, a ”general consensus as to what activi-ties are included under the CSR umbrella has not emerged” (Servaes and Tamayo (2012), p.2). Baron (2001) argues that”corporate social responsibility is an ill- and incompletely de-fined concept”(p. 9). The European Commission (2001) defines CSR as a ”concept whereby companies integrate social and environmental concerns in their business operations and their interactions with their stakeholders on a voluntary basis” and”being social responsible means not only fulfilling legal expectations, but also going beyond compliance and investing ’more’
into human capital, the environment and the relations with stakeholders”(p. 6). A very similar definition was proposed by the World business council for sustainable development (2003): ”CSR is the commitment of a business to contribute to sustainable economic devel-opment, working with employees, their families, the local community and society at large to improve their quality of life”(p. 5). To sum up, corporate social responsibility (CSR) is a sustainable voluntary effort to accomplish social, economic or environmental goals. Based on this definition, our model shows the incentives for CSR and the impact for the consumers in a competitive market.
Due to the imprecise definition of CSR, multiple theoretical approaches exist to model social behavior. For example, Alves and Santos-Pinto (2008) provide a theory of corporate social responsibility in a Cournot duopoly where firms can donate a certain amount of money per each unit sold to social projects to be socially responsible.
Another stream of literature models social behavior from a stakeholder management perspec-tive with a focus on consumers. Consequently, a the firm’s objecperspec-tive is given by its profit and a fraction of consumer surplus. This approach was applied to delegation models by Goering (2007) and extended by Kopel and Brand (2012, 2013). Furthermore, Goering (2012) argues that”this definition of CSR implies the firm is willing to accept less profits to act in a more social concerned manner” (p. 144). Therefore, CSR is costly. In a mixed market with a pri-vate for-profit firm, a public firm and a ”commercial” non-profit organization (NPO) which differ in their respective objective function, Goering (2008) finds that the technical efficiency, or production costs of each firm, are crucial in determining whether social welfare rises or falls as the NPO places more weight on the consumer surplus. Besides market competition, this approach has also been applied to supply chain management. Goering (2012) analyzes
a bilateral monopoly where either the manufacturer with a two-part tariff or the retailer can be socially concerned. Brand and Grothe (2013) extend the paper such that both firms can be socially concerned. In a further model, Brand and Grothe (2014) analyze a bilateral monopoly with an imperfectly coordinated marketing channel. There they show, that firms’
social concern results in a Pareto-improvement due to a weakened double marginalization problem.
Several papers highlight the strategic use of CSR where ”CSR attributes are like any other attributes a firm offers” (McWilliams and Siegel (2001), p. 125) to improve the performance of the firm. They discuss a general supply and demand model and figure out which param-eters are positive or negative related to CSR efforts. Baron (2001) uses strategic CSR as firms’ reaction to social concerns where they can donate an additional amount for environ-mental issues for each unit sold. Firms react to a threat of activists who want to change the production practices of the firm. A first-mover advantage of CSR activities for a socially responsible firm and the necessary conditions are examined by Kopel (2009).
Complementary to these static models, different authors consider the long-term effect of strategic CSR and whether it is sustainable. For example, Lundgren (2011) investigates an optimal control problem of a socially responsible firm where CSR investment has a positive effect on the goodwill stock. The dynamic approach is carried on by Wirl (2013) and Wirl et al. (2013). The latter asks why CSR waves can be observed. Starting with an intertem-poral optimization problem of a social firm, they add interaction with competitors which is essential: If CSR is profitable for one firm, it may be profitable for the competitors as well. Strategic interactions w.r.t to CSR activities are the focus of Wirl (2013). He investi-gates the differences of open-loop and Markov perfect Nash equilibria with the cooperation as a benchmark. Becchetti et al. (2012) combine the idea of Hotelling (1929) and dynamic CSR investment. A profit maximizing firm faces a non-profit socially responsible competitor.
The location model of Hotelling represents a ”ethical segment” [0,1] where consumers are heterogeneous towards social and environmental features of the final good. The non-profit social firm is located at one and the monopolist can decide endogenously about its location or degree of social responsibility which increases the production costs but long-run CSR in-vestment is more efficient. Therefore, social behavior is a response to the competition of a
non-profit firm.
The strategic CSR approach is not without problems. For example, Baron (2001) argues:
”A firm motivated only by profits may adopt a practice labeled as socially responsible because it increases the demand for its product. This strategic CSR is simply profit-maximization strategy motivated by self interest and not by conception of corporate social responsibility.”
(p. 9). Nevertheless, we pick up the idea about endogenous CSR investment, additional marginal costs and competition and use CSR investment as a positive signal to advance the goodwill of consumers. Based on the idea of Nerlove and Arrow (1962), each firm can make costly investment in order to raise its own goodwill (reputation or brand equity). The higher the own goodwill stock the higher are the current sales. In a duopoly, both firms must decide initially if they want to invest in a socially responsible or non-socially responsible way. We want to examine the following points:
• What differentiates socially responsible strategies from other investment strategies?
Motivated by practical examples, we give a definition of socially responsible investment.
• Does socially responsible behavior lead to an economic advantage? Furthermore, are socially responsible firms able to outperform a non-social competitor?
• Which combination of firm strategies is optimal for consumers by means of consumer surplus?
Initially, two firms decide if they want to invest socially responsible or not over an infinite time horizon. Both investments create goodwill of consumers but in contrast to non-social investment, social investment raises the production costs as well. However, social investment is more sustainable which results in a lower depreciation of the goodwill stock. Referring to the literature, we use CSR as strategic investment. Within a differential game we derive the Markov Perfect Equilibria (MPE) given their initial decision about social behavior. The results show that the initial decision of the firms depends on the relation of additional cost from social investment and the sustainability of the goodwill stock. Overall, either both firms invest socially or none. If business stealing attracts consumers from the competitor, the firms may end up in a prisoner’s dilemma. Consumers’ point of view deviates from firms’ point of view, but could prevent firms from the prisoner’s dilemma under certain circumstances.
Our paper is organized as follows. Section 3.2 presents the framework. Afterwards, we show equilibria and consumer surplus in section 3.3. The last section of our paper concludes and discusses future research.