Corporate social responsibility and marketing channel coordination

We analyze a simple linear demand bilateral monopoly situation where one of the firms, either the up-stream manufacturer or the down-stream retailer, is socially concerned in terms of its desire to enhance its end-customers’ welfare in addition to the traditional profit motive. Two cases are explored: the up-stream producer exhibits corporate social responsibility (CSR) in one case and the down-stream retailer in the other. In the two-stage game, the retailer makes their quantity-setting decision in stage-two, given the two-part tariff (wholesale price and fixed franchise fee) set by the stage-one producer. In this setting, among other things, we find that the optimal channel-coordinating tariff is very different from the standard pure profit-maximizing two-part tariff. For example, if either firm in the supply/marketing chain exhibits CSR, we show the optimal wholesale price does not equal the manufacturer’s marginal production cost, nor does the fixed fee equal the monopoly profit earned by the retailer. Finally, we find that our two-part tariff CSR model provides a theoretical rationale for the empirical finding of little to no correlation between CSR and firm profits.

► We analyze a bilateral monopoly where one firm is socially concerned.
► The coordinating tariff is very different from the standard two-part tariff.
► The optimal wholesale price does not equal the producer’s marginal cost.
► The optimal fixed fee does not equal the profit earned by the retailer.
► This helps explain the lack of correlation between social concern and firm profits.