A Two-Stage Duopoly Game with Ethical Labeling and Price Competition when Consumers differ in Preferences
AbstractWe study a two-stage duopoly game, where, at the first stage, firms choose if adopting or not a social responsibility label. The firm who adopts the social responsibility label (the ethical firm) has high marginal costs, while the firm who doesn’t adopt it (the standard firm), supports low marginal costs. After the first stage, each firm knows the choice made by its rival and, at the second stage of the game, chooses prices. Consumers are divided into two groups: the group of consumers who prefers buying the good by the ethical firm and the group of consumers who prefers buying the good by the lowest price firm. Depending on the difference between the high and the low marginal cost and on the proportions of the two groups of consumers, the game has two asymmetric or two symmetric Sub-game Perfect Nash Equilibria. Symmetric Nash Equilibria imply that both firms makes the same choice at the first stage of the game (both decide to be ethical or standard), while asymmetric Nash Equilibria imply different choices at the first stage of the game: one of the two firms chooses to be ethical and the other standard. We analyzed the same model of Davies (2005) changing one of its assumption: the proportions of the two groups of consumers are not fixed a priori. With this new assumption, results of Davies (2005) are no more satisfied. In Davies (2005), ethical labeling cannot eliminate standard production when there are two firms and the marginal cost of ethical firm is higher than the marginal cost of standard firm: in equilibrium, one of the two firms always chooses to be standard at the first stage of the game. In our model (a duopoly where marginal cost of the ethical firm is higher than marginal cost of standard firm) instead it exists a condition on the model’s parameters such that ethical labeling, in equilibrium, can eliminate standard production: if that particular condition is satisfied, it exists a symmetric subgame perfect Nash Equilibrium where both firms chooses, at the first stage of the game, to be ethical.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 11544.
Date of creation: 12 Nov 2008
Date of revision:
Social Responsibility; Ethical labeling; Price Competition; Duopoly;
Find related papers by JEL classification:
- M14 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
- D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-18 (All new papers)
- NEP-COM-2008-11-18 (Industrial Competition)
- NEP-MIC-2008-11-18 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bjorner, Thomas Bue & Hansen, L.G.Lars Garn & Russell, Clifford S., 2004.
"Environmental labeling and consumers' choice--an empirical analysis of the effect of the Nordic Swan,"
Journal of Environmental Economics and Management,
Elsevier, vol. 47(3), pages 411-434, May.
- Thomas Bue Bjorner & Lars Garn Hansen & Clifford S. Russell, 2002. "Environmental Labelling and Consumer's Choice - An Empirical Analysis of the Effect of the Nordic Swan," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0203, Vanderbilt University Department of Economics.
- Amacher, Gregory S. & Koskela, Erkki & Ollikainen, Markku, 2004. "Environmental quality competition and eco-labeling," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 284-306, March.
- Blume, Andreas, 2003. "Bertrand without fudge," Economics Letters, Elsevier, Elsevier, vol. 78(2), pages 167-168, February.
- Klaus Conrad, 2005. "Price Competition and Product Differentiation When Consumers Care for the Environment," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 31(1), pages 1-19, 05.
- Toshihiro Uchida, 2007. "Information Disclosure Policies: When Do They Bring Environmental Improvements?," International Advances in Economic Research, Springer, Springer, vol. 13(1), pages 47-64, February.
- Ronald B. Davies, 2000.
"Abstinence from Child Labor and Profit Seeking,"
University of Oregon Economics Department Working Papers, University of Oregon Economics Department
2000-1, University of Oregon Economics Department, revised 01 Aug 2002.
- Liu, Zugang (Leo) & Anderson, Trisha D. & Cruz, Jose M., 2012. "Consumer environmental awareness and competition in two-stage supply chains," European Journal of Operational Research, Elsevier, Elsevier, vol. 218(3), pages 602-613.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.