Should partially cooperating firms care for consumers?

This paper considers a multi-stage game model with two partially cooperating firms whose objective functions include maximizing not only their own profits but also a portion of their rivals’ profits. In the first stage, each firm independently and simultaneously decides whether to incorporate consumer surplus into its objective function. In the second stage, any firm that chooses to do so selects its level of consumer orientation. In the third stage, after observing the rival’s choices in the first and second stages, each firm independently and simultaneously chooses its output level. The paper characterizes the equilibrium of this model.