Product Differentiation when "Quality is a Matter of Tastes": the Case of Corporate Social Responsibility with Asymmetric Information

To analyze the new phenomenon of competition in corporate social responsibility (CSR) we adopt a product differentiation approach in which the Hotelling segment is reinterpreted as the space of product SR characteristics and consumer tastes are uncertain. We find equilibria of the pure location and of the price-location games and show what changes when we move from a duopoly of profit maximizing producers to a mixed duopoly. Our findings illustrate that a nonzero degree of CSR is the optimal choice of profit maximizing corporations under reasonable parametric intervals of consumers’ concern for SR, corporate cost of CSR and uncertainty about consumer tastes. Our model of location with unidirectional costs applied to competition in CSR may be generalised to a larger class of "hybrid" (horizontal/vertical) differentiation models in which the perception of a costly investment as a "quality" improvement is a matter of tastes.