Corporate social responsibility and product quality: Complements or substitutes?

We examine how corporate social responsibility (CSR) interacts with firm strategy, particularly product quality and price. In monopoly markets where consumers are willing to pay a premium for CSR and firms choose CSR optimally, we find that CSR is a substitute for product quality (i.e., lower quality firms invest more in CSR) under common market conditions such as when there is a sizable segment of consumers who value product quality higher than other consumers. We show that this relationship between CSR and product quality further extends to competitive markets. Specifically, in a duopoly where the quality differentiation is sufficiently large, the high quality product is offered with a lower level of CSR than the low quality product. Consistent with the theory, we report preliminary empirical evidence that suggests high end brands are significantly less likely than mainstream brands to acquire a strong CSR reputation. Overall, our research shows that the optimal commitment to CSR may vary depending on other elements of firm strategy such as pricing and product quality as well as market characteristics such as market composition, competition and product differentiation.