The dynamics of ethical product differentiation and the habit formation of socially responsible consumers

Leonardo Becchetti and Nazaria Solferino ()
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Nazaria Solferino: Associazione Italiana per la Cultura della Cooperazione e del Non Profit, Postal: P.le della Vittoria, , 15 - 47100 Forli', , Italy, http://www.aiccon.it

No 8-2005, AICCON Working Papers from 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.

Keywords: Socially responsible consumers; ethical product differentiation; profit maximizing producer (search for similar items in EconPapers)
JEL-codes: A13 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2005-02-20
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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