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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.

Suggested Citation

  • Becchetti, Leonardo & Solferino, Nazaria, 2005. "The dynamics of ethical product differentiation and the habit formation of socially responsible consumers," AICCON Working Papers 8-2005, Associazione Italiana per la Cultura della Cooperazione e del Non Profit.
    • Handle: RePEc:ris:aiccon:2005_008
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    References listed on IDEAS

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    1. Anderson, Simon, 1987. "Spatial competition and price leadership," International Journal of Industrial Organization, Elsevier, vol. 5(4), pages 369-398.
    2. Steven Suranovic, 2002. "International Labour and Environmental Standards Agreements: Is This Fair Trade?," The World Economy, Wiley Blackwell, vol. 25(2), pages 231-245, February.
    3. Economides, Nicholas, 1986. "Minimal and maximal product differentiation in Hotelling's duopoly," Economics Letters, Elsevier, vol. 21(1), pages 67-71.
    4. Fabrizio Adriani & Leonardo Becchetti, 2004. "Fair Trade: A 'Third Generation' Welfare Mechanism to Make Globalisation Sustainable," CEIS Research Paper 62, Tor Vergata University, CEIS.
    5. 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, April.
    6. Ronald Mendoza & Chandrika Bahadur, 2002. "Toward Free and Fair Trade: A Global Public Good Perspective," Challenge, Taylor & Francis Journals, vol. 45(5), pages 21-62.
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    Citations

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    Cited by:

    1. 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.
    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. 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.

    More about this item

    Keywords

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

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values

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