1,2University of Graz Austria
1[email protected] 2[email protected]
Keywords: Socially concerned firms; Corporate social responsibility; Strategic incentives; Mixed oligopoly
In the literature several approaches have been proposed to ensure the sustainability over time of an agreement reached at the starting date of a differential game. One of the approaches appropriate for two-player differential games is to support the cooperative solution by incentive strategies, [2], [3]. Incentive strategies are functions of the possible deviation of the other player and recommend to each player to implement his part of the agreement whenever the other player is doing so. The equilibrium incentive approach allows embodying the cooperative solution with an equilibrium property. Therefore, by definition each player will find individually rational to stick to his part in the coordinated solution. One important property that should be checked is the credibility of these incentive strategies, [3], [4]. These strategies are credible if each player will implement his incentive strategy and not the coordinated solution if he observes that the other one has deviated from the agreement. Recently some papers, [5], [6], have provided conditions to check for the credibility of incentive strategies for the class of linear-state and linear-quadratic differential games. To preserve the special structures of the games the analyses have been restricted to linear incentive strategies that are not always credible.
Corporate Social Responsibility (henceforth CSR) has become mainstream and the majority of managers believes that CSR creates shareholder value, results in a competitive advantage and in cost savings (e.g. Fortune 2003). However, theoretical research on strategy and governance issues has largely neglected the topic of CSR until recently (see Kopel 2011 for a literature review). Since socially concerned firms are active in the same markets as profit-maximizing firms, it is of considerable interest to
ask which goals socially concerned firms might pursue and how their presence affects the firms' performance and welfare (Goering 2010, 2008a, b, Becchetti and Hybrechts 2008, Casadesus-Masanell and Ghemawat 2006, but also Marwell and McInerney 2005, Schiff and Weisbrod 1991, and Lien 2002). Likewise, it also seems important to consider the organizational governance of these socially responsible firms, i.e. how their organizational structure and incentive systems differ from those of firms with other objectives (e.g. Berrone and Gomez-Mejia 2009; Mahoney and Thorne 2005, 2006, Frye et al. 2006) and which differences in management's behavior are induced (Berger et al. 2007, Du Bois et al. 2004). Furthermore, the interaction between the firms' governance and product market competition is interesting and worthwhile to study.
In our paper we consider a dynamic game which addresses this management problem. A profit-maximizing firm competes against a socially concerned firm in a linear homogenous-product duopoly. In contrast to the profit-maximizing firm, the socially responsible firm is assumed to maximize an objective function which takes its profit plus a share of consumer surplus into account (see also Lambertini and Tampieri 2010, Goering 2007, 2008a,b, Lien 2002). To include organizational governance aspects in the model, we assume that both firms have the option to hire a manager, who is taking over the responsibility to determine the production quantity on behalf of the firms' owners. If firms hire a manager, they write incentive contracts for their managers to provide strategic incentives. Within this model, we try to answer the following main research questions: (i) Will both firms hire managers and delegate the production decision? (ii) Does it pay off for a firm to be socially concerned, i.e. can it yield a competitive advantage to pursue goals different from profit and compensate the manager for it? (iii) What is the impact of an increasing concern for consumer welfare on prices, quantities, industry profits and welfare?
Our multi-stage game yields the following insights. In the subgame-perfect equilibrium, both firms' dominant strategy is to hire a manager and delegate the production decision. If the profit-maximizing firm and the socially responsible firm have identical unit production costs, then the socially responsible firm has a higher market share than the profit-maximizing firm and obtains a higher profit. A comparative statics analysis shows a monotonic increase of the value of the objective function if the share of consumer surplus is increased. On the other hand, we find a non-monotonic relationship between the equilibrium profit of the socially concerned firm and the share of consumer surplus the firm includes in its objective function. The firm's profit first increases if this
share is increased, but then decreases. In the light of the revived discussion about stakeholder or shareholder view, the finding that a firm's profit can simultaneously achieve both goals, that is increase the value for its stakeholders and at the same time increase its profit, even if it competes head-on against a profit-maximizing rival, is interesting. The reason here is that in a situation of strategic interaction accounting partially for a stakeholder group (here the consumers) can serve as a commitment device and can result in an increase in the socially concerned firm's competitive advantage. In this sense, ... investing in stakeholder management may be complementary to shareholder value creation and may indeed provide a basis for competitive advantage ... (Hillman and Keim 2001, p. 135). This result shows that non-profit maximizing firms competing against profit-maximizing rivals in an imperfect market can indeed have an advantage (see Kelsey and Milne 2008). It is important to notice, however, that such a social concern is rewarded only up to a point, that is "it pays to be good, but not too good" (Mintzberg 1983). In other words, it pays off to pay attention to stakeholders, but not too much. If the firm already puts a high weight on consumer surplus, increasing the weight even further destroys shareholder value. Furthermore, we also find that for an increase in this share, industry output and total welfare increases. If the profit- maximizing firm and the socially responsible firm have different unit production costs, then the comparison obviously depends on the cost differential. However, if the cost difference is not too large, then the insights of the symmetric cost case carry over to the more general situation with asymmetric costs.
References
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