Conflict and Corporate Social Responsibility in Duopoly

Abstract

Background: Recent scientific research explains corporate social responsibility as an economic activity. This paper interprets social responsibility as a means of power to increase firms' market share in a duopoly. Objectives: This paper analyses the duopoly model in which firms decide on optimal social investments and production in two phases. The basic research question is how the significance of the conflict affects social investments, market shares, production quantities, profits, and social welfare. Methods / Approach: Conflict technology is described by contest success functions determining market shares. Game theory, optimization, and comparative statics are used in the analysis. Results: The conditions of equilibrium existence and its characteristics are described. Conflict adversely affects the profit of the inefficient firm while it favourably affects social welfare. Conflict's impact on an efficient firm's profit depends on the marginal cost difference. Conclusions: If there is no significant cost difference, it is more favourable for firms not to invest in socially responsible activities by agreement, which hurts social welfare. When marginal cost difference is significant, corporate social responsibility increases an efficient firm's profit, positively impacting social welfare.