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

  • 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)

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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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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References listed on IDEAS
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  1. Economides, Nicholas, 1986. "Minimal and maximal product differentiation in Hotelling's duopoly," Economics Letters, Elsevier, vol. 21(1), pages 67-71.
  2. repec:cup:cbooks:9780521637329 is not listed on IDEAS
  3. 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.
  4. repec:dgr:rugsom:01c48 is not listed on IDEAS
  5. Fabrizio Adriani & Leonardo Becchetti, 2004. "Fair Trade: A 'Third Generation' Welfare Mechanism to Make Globalisation Sustainable," CEIS Research Paper 62, Tor Vergata University, CEIS.
  6. 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.
  7. Anderson, Simon, 1987. "Spatial competition and price leadership," International Journal of Industrial Organization, Elsevier, vol. 5(4), pages 369-398.
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