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The dynamics of ethical product differentiation and the habit formation of socially responsible consumers

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  • Becchetti, Leonardo

    ()
    (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)

  • Solferino, Nazaria

    ()
    (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)

Abstract

In our model of ethical product differentiation two duopolists (a zero profit socially concerned producer and a profit maximizing producer) compete over prices and (costly) socially and environmentally responsible features of their products under a given law of motion of consumer habits. In a continuous time model in which the location of the zero profit social responsible entrant is fixed and the profit maximizing producer (PMP) limits himself to price competition without ethical imitation, we show that the optimal dynamic price is always lower than his optimal static price since the PMP producer knows that, by leaving too much market share to the other producer, he will reinforce the habit of socially responsible consumption and loose further market share in the future. We inspect the properties of equilibria when the PMP can ethically imitate the entrant and when the entrant is free to choose his location. We find that, in the first case, the threshold triggering a PMP strategy of ethical imitation and minimum price differentiation is lower in the dynamic than in the static case, depending on the shadow cost of changes in consumers social responsibility.

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Bibliographic Info

Paper provided by Associazione Italiana per la Cultura della Cooperazione e del Non Profit in its series AICCON Working Papers with number 8-2005.

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Length: 43 pages
Date of creation: 20 Feb 2005
Date of revision:
Handle: RePEc:ris:aiccon:2005_008

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Keywords: Socially responsible consumers; ethical product differentiation; profit maximizing producer;

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References

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  1. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, October.
  2. Ronald Mendoza & Chandrika Bahadur, 2002. "Toward Free and Fair Trade: A Global Public Good Perspective," Challenge, M.E. Sharpe, Inc., vol. 45(5), pages 21-62, September.
  3. Maseland, Robbert & Vaal, Albert de, 2001. "How fair is fair trade?," Research Report 01C48, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  4. Anderson, Simon, 1987. "Spatial competition and price leadership," International Journal of Industrial Organization, Elsevier, vol. 5(4), pages 369-398.
  5. Steven Suranovic, 2002. "International Labour and Environmental Standards Agreements: Is This Fair Trade?," The World Economy, Wiley Blackwell, vol. 25(2), pages 231-245, 02.
  6. Fabrizio Adriani & Leonardo Becchetti, 2004. "Fair Trade: A 'Third Generation' Welfare Mechanism to Make Globalisation Sustainable," CEIS Research Paper 62, Tor Vergata University, CEIS.
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Citations

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Cited by:
  1. Leonardo Becchetti & Luisa Giallonardo & Elisabetta Tessitore, 2006. "Consumer driven market mechanisms to fight inequality: the case of CSR/product differentiation models with asymmetric information," Working Papers 50, ECINEQ, Society for the Study of Economic Inequality.
  2. Pierre Kohler, 2006. "The Economics of Fair Trade: For Whose Benefit? An Investigation into the Limits of Fair Trade as a Development Tool and the Risk of Clean-Washing," IHEID Working Papers 06-2007, Economics Section, The Graduate Institute of International Studies, revised Oct 2006.
  3. Wirl, Franz & Feichtinger, Gustav & Kort, Peter M., 2013. "Individual firm and market dynamics of CSR activities," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 169-182.

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