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A Two-Stage Duopoly Game with Ethical Labeling and Price Competition when Consumers differ in Preferences

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  • Fanelli, Domenico

Abstract

We 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.

Suggested Citation

  • Fanelli, Domenico, 2008. "A Two-Stage Duopoly Game with Ethical Labeling and Price Competition when Consumers differ in Preferences," MPRA Paper 11544, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:11544
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    File URL: https://mpra.ub.uni-muenchen.de/11544/1/MPRA_paper_11544.pdf
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    References listed on IDEAS

    as
    1. Blume, Andreas, 2003. "Bertrand without fudge," Economics Letters, Elsevier, vol. 78(2), pages 167-168, February.
    2. Klaus Conrad, 2005. "Price Competition and Product Differentiation When Consumers Care for the Environment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 31(1), pages 1-19, May.
    3. Davies, Ronald B., 2005. "Abstinence from child labor and profit seeking," Journal of Development Economics, Elsevier, vol. 76(1), pages 251-263, February.
    4. 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.
    5. 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.
    6. repec:kap:iaecre:v:13:y:2007:i:1:p:47-64 is not listed on IDEAS
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    Cited by:

    1. 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, vol. 218(3), pages 602-613.
    2. Vasileiou, Efi & Georgantzís, Nikolaos, 2015. "An experiment on energy-saving competition with socially responsible consumers: Opening the black box," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 58(C), pages 1-10.

    More about this item

    Keywords

    Social Responsibility; Ethical labeling; Price Competition; Duopoly;

    JEL classification:

    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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