A signaling theory of consumer boycotts

We present a theory that explains the prevalence of consumer boycotts. In our model, a firm does not know how concerned consumers are about the firm's misconduct. Because it is only optimal for the firm to alter its behavior if consumers are very concerned, consumers have an incentive to overstate their concern by boycotting the firm. We show that free-riding problems do not preclude such boycotting. In fact, in each equilibrium boycotting occurs with positive probability and the firm always caters to the demands of those who boycott should boycotting ensue.