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.
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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.:
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