Volume 36, Issue 4. Network externalities and corporate social responsibility

Transcription

1 Volume 36, Issue 4 Network externaltes and corporate socal responsblty Lucano Fant Department of Economcs and Management, Unversty of Psa Domenco Buccella Department of Economcs, Kozmnsk Unversty Abstract Ths paper examnes a duopoly market wth Corporate Socal Responsblty (CSR) frms (senstve to consumer surplus). It s shown that, n contrast to the conventonal result that the hgher the weght on CSR the lower the frms' proftablty, when network externaltes n consumpton are present even the frms' proftablty may be enhanced by the presence of socal concerns. Ths fndng opens a new vew of CSR rules by the most worldwde engaged n socal actvtes frms that operate n the more and more ncreasng sectors of network goods. Lucano Fant, Department of Economcs and Management, Unversty of Psa, Va Cosmo Rdolf, 10, I 5614 Psa (PI), Italy. E-mal: lfant@ec.unp.t; tel.: ; fax: Domenco Buccella, Department of Economcs, Kozmnsk Unversty, Jagellońska Street, 57/ Warsaw, Poland. E-mal: buccella@kozmnsk.edu.pl; tel.: We thank an anonymous referee for valuable comments whch have contrbuted to mprove substantally the qualty and clarty of ths paper. The usual dsclamers apply. Ctaton: Lucano Fant and Domenco Buccella, (016) ''Network externaltes and corporate socal responsblty'', Economcs Bulletn, Volume 36, Issue 4, pages Contact: Lucano Fant - lfant@ec.unp.t, Domenco Buccella - buccella@kozmnsk.edu.pl. Submtted: March, 016. Publshed: November 09, 016.

2 1. Introducton In the recent years the frms Corporate Socal Responsblty (CSR) has been an economc ssue more and more frequented also n the academc lterature (e.g. Baron 001, 009; Jensen, 001; Goerng, 007, 008; Lambertn and Tamper, 010; Benabou and Trole, 010). The standard fndng s that profts are expected to reduce when a CSR behavour s followed. Ths, for nstance, always holds true n the basc Cournot duopoly model wth CSR frms. Then, ths makes rather puzzlng to show why frms should engage themselves n socal actvtes f the latter are harmng ther profts. Thus, the lterature has very recently focused on possble ndrect postve feedbacks that CSR frms may have from ts socal concerns. 1 Whle the tradtonal lterature has mplctly assumed that people s demands for a good are ndependent of one another, t has been ncreasngly acknowledged that for some goods, however, one person s demand also depends on the demands of other people, or, n other words, a network externalty n consumpton exsts. It s known that, for many products, the utlty derved by one consumer of the good ncreases wth the number of other consumers of that good; that s, the welfare of each consumer s enhanced by the total sales of the good. A typcal example of postve network externalty s the so-called Bandwagon Effect: the desre to have a good because almost everyone else has t (.e. clothng). Other typcal examples of network goods are telephone and software: t s natural to observe that the utlty of a partcular consumer from usng a telephone or a software ncreases wth the number of other telephone or software users. The smple mechansm of network effects assumed here, n the sprt of Katz and Shapro (1985), s that the surplus that a frm s clent obtans ncreases drectly wth the number of other clents of ths frm. Because of the dramatc development pace of network ndustres n recent years, an ncreasng number of scholars has started studyng how the presence of postve consumpton externaltes/network effects may alter the results of the standard models of mperfect competton (e.g. Katz and Shapro, 1985), focusng currently on the role of strategc delegaton (Hoerng, 01; Chrco and Scrmtore, 013; Battacharee and Pal, 014). However, the ssue of CSR n network ndustres has been largely, and surprsngly, neglected. In fact, as reported by KPMG, CSR actvtes are unquestonably a manstream busness practce worldwde: 71 percent of 4,100 companes surveyed n 41 countres n 013. In partcular, among the sectors whch experenced an mpressve development pace over the recent years, noteworthy the telecommuncatons & meda sectors ncreased ther CSR reportng from 47 percent n 008 to 75 percent n 013, and electroncs & computers from 58 percent to 78 percent, two of the hghest levels among the surveyed ndustres (KPMG, 013). Moreover, the Reputaton Insttute global CSR survey shows that, among the world s top ten companes wth the best CSR reputatons, companes operatng n network ndustres are predomnant: Google ranks frst, Mcrosoft 4 th, Apple 7 th and Intel 8 th (Reputaton Insttute, 015). Therefore, the present work ams to fll ths gap and ndeed t nvestgates whether and how the standard fndng that profts are expected to reduce adoptng a CSR behavour also holds when the Cournot competton occurs n network goods ndustres. The key result of the paper s the followng. In a Cournot duopoly wth network goods, f both frms adopt CSR rules (.e., they are senstve to consumer surplus), the equlbrum profts that they may obtan are larger than they were only proft-seekng. Notably, an optmal degree of socal care by frms does exst. Ths fndng has a remarkable consequence. It opens a new perspectve on the ratonale for frms to operate 1 The lterature has ponted out that CSR could have the potental to amelorate even frms proftablty through varous channels: for nstance by reducng turnover rates, and operatng costs, by enhancng effcency, by attractng better and/or more loyal and motvated employees (e.g. Nurn and Tan, 010), and fnally by strategcally ncreasng rvals' costs when rvals are only proft-seekng (e.g. Goerng, 007; Kopel and Brand, 01). However, n the absence of the above mentoned motves, the expected result s that a CSR behavour always lowers the frm s proft (even n a strategc context f all the frms follow CSR rules).

3 under CSR rules: the choce to pursue socal nterest s dctated by proft-enhancng reasons rather than phlanthropc purposes. Moreover ths result s qualtatvely confrmed also n the case n whch the prvate frm competes wth a publc frm (.e. n a mxed duopoly), as shown n the Appendx. The remander of the artcle s organzed as follows. Secton descrbes the model: frst, the basc ngredents of an ndustry wth network effects and CSR behavours are presented and then the man result s derved. Fnally, the last secton brngs the paper to ts conclusons and suggests further drectons of research on the subect.. The model We assume a duopoly n whch frms produce homogeneous network goods. The nverse demand functons (see, e.g., Hoerng 01; Chrco and Scrmtore, 013; Battacharee and Pal, 014; Fant and Buccella, 016) are as follows, p a q q n( y y ), (1) where p s the prce of goods, q denotes the quantty of the goods produced by frm ( 1, ), y denotes the consumers' expectaton about frm 's equlbrum network sze, the parameter n [0,1) ndcates the strength of network effects (.e. the hgher the value of the parameter the stronger the network effects), and a 0 s a demand parameter. The frm s proft functon s gven by: ( p c) q, () where c s the constant margnal cost. For tractablty, and wthout loss of generalty, margnal costs are assumed to be zero. Followng the recent establshed lterature (e.g. Goerng 007, 008; Lambertn and Tamper, 010; Kopel and Brand, 01), we defne the ncluson of a part of the market consumer surplus k as the frm s socal concern or care for consumer outcomes n the market. Consequently, the CSR frm s obectve functon may be specfed as a smple parameterzed combnaton of profts and consumer surplus. Thus, the CSR frm obectve functon (W) s: ( q q ) n( y y ) W kcs a q q n( y y ) q k (3) where k [0,1] denotes the weght that CSR frm assgns to consumer surplus. 3,4 The works of Hoerng (01), Chrco and Scrmtore (013) and Battacharee and Pal (014) consder dfferentated goods; however, by settng the dfferentaton parameter equal to 1 n those contrbutons, the demand functon n (1) s mmedately obtaned. 3 Therefore, stakeholders exercse pressure as regards the frm s obectve and, once nvolved n the frm s governance, set the level of socal engagement. Thus, n the current model, the prvate owners of the socally responsble frm takes the level of socal concern k as exogenously gven, for nstance, by the customary toughness of the stakeholders ntegrated n the frm's obectve functon. Ths s consstent wth the results of the emprcal study of Sptzeck and Hansen (010), who fnd that the stakeholder engagement mechansm s manly confned to dalogue & ssues advsory. In addton, because the frms compete for the same clents n the ndustry, t can be reasonably assumed that the socal engagement level stakeholders demand s the same for both companes.

4 Frms compete on the product market à la Cournot. Gven the CSR frm s obectve functon (3), the equlbrum of the second stage of the game (the market game) must satsfy: W a q ( ) ( ) 0 q n y y k q q q (4) for, = 1, and. From (4), we obtan the reacton functons 5 q ( q, y, y ) a (1 k) q n( y y ) k (5) As usual, then we mpose the addtonal ratonal expectatons condtons, that s y q 1 1 and y q. Hence, solvng the system composed by (5) and ts counterpart for frm, we obtan the fnal equlbrum output and proft: a q q q 3 ( n k) (6) a (1 k) 3 ( nk) (7) Note that the satsfacton of the non-negatvty constrant on profts requres ultmately that 1 k k (that s, the frm s nterest for the consumer s welfare has not to be too hgh), whch we assume to hold throughout the paper. 6 As expected, the socal concerns should not be too large for ensurng a vable equlbrum ndustry. Hence, the followng noteworthy result holds: Result 1. If the network effect s suffcently ntense, there s always a threshold value k* below (above) whch the hgher k the hgher (lower) proft s. 4 The value of the consumer surplus derves from the maxmsaton of the representatve consumer utlty functon mnus the expendture for the goods consumed, that s, CS U p( q q ) (see, for nstance, Nakamura, 013), where 1 1 U a( q q ) ( q q qq ) n ( y y ) q ( y y ) q ( y y y y ) wth, 1,; (see Battacharee and Pal, 014). When ratonal expectatons realze,.e. y q,, 1,, ( q q) the value of the consumer surplus bols down to CS (1 n), both wth the current as well as the standard defnton of the value of the area comprses between the demand functon and the prce pad by consumers. 5 By passng, notce that the reacton functons are, as expected, negatvely sloped, that s products are perceved by frms as strategc substtutes (.e. network effects do not affect the nclnaton of the reacton functons). 6 In fact, t can be easly observed from eq. (6) that the equlbrum quantty s postve for any k [0,1].

5 Fg. 1. Plot of the threshold curves 0, 0 k drawn for a gven value of a 1. n the [ nk, ] space. Legend: The curves are Proof: Ths result s proved by observng that a n k [ 4( )] 3 k [3 ( n k)] (8) and 1 0 k k * n k. Corollary. Provded that n>0.50, an optmal postve value of k* always does exst and ths optmal value s ncreasng wth n: the larger s the network externalty, the hgher s the optmal level of the senstvty to consumer surplus by frms. Fg.1 gves a graphcal representaton of the contents of Result 1 and the Corollary, n whch t s easy to see that f the network effect s suffcently ntense (at least n>0.5, and k s not too large) an optmal postve value of the parameter measurng the socal concern maxmsng frms profts does always exst. Ths means that the presence of very ntense network effects may make convenent for frms to be consumers welfare-nterested (but not too much nterested): nterestngly, provded that n>0.50, there s always a value of the socal concern, k*, whch maxmses profts. 3. Conclusons Ths paper s motvated by the wdely observed presence of frms operatng n network ndustres and adoptng CSR rules. The paper shows that, n a Cournot duopoly wth network goods, f both frms adopt CSR rules (.e., they are senstve to consumer surplus), they may obtan profts hgher

6 than they were only proft-seekng. In partcular, an optmal degree of socal care by frms does exst. The mplcaton of our fndngs s strkng. The choce to have socal nterest s not phlanthropc : t s motvated by proft-enhancng reasons. Ths fndng opens a new vew of CSR rules by frms operatng n the more and more ncreasng sectors of network goods, and seems to provde wth a plausble explanaton of the emprcal evdence that frms followng CSR rules are ncreasngly present n network ndustres such as telecommuncatons & meda and electroncs & computers. 7 So far the analyss puts asde the possblty that frms can choose to be ether CSR or proftseekng. Thus, although t s natural to beleve that when the CSR frm makes hgher profts (.e. t s delegatng and s enough senstve to socal cares) also the proft-seekng frm fnds convenent to shft to CSR, the equlbrum type should be endogenously determned n a sequental play. Ths s left for further research. Appendx The mxed duopoly model: publc frm vs prvate frm wth CSR We consder here a mxed duopoly wth network effects and CSR actvtes n the sprt of Nakamura (013) who, however, studes the case of dfferentated products. We focus here on the ssue of the possblty that, n a market for network goods, a prvate frm may reach a hgher proft wth CSR behavours than beng only proft-seekng also when the rval frm s a publc frm maxmzng, as usual, the socal welfare. In other words, we check the robustness to the mxed duopoly of the result obtaned for the prvate duopoly (n the man text). One publc frm, denoted by 1, and one prvate frm, denoted by, produce homogeneous network goods. The nverse demand functons s as n eq. (1) n the man text. Wth respect to the man model, t s assumed the presence of a quadratc cost functon 8 C( q) cq, c 1, 1,. The publc frm maxmzes the overall socal welfare (SW) and, thus, the frm s obectve functon can be specfed as the sum of own profts, the profts of the prvate frm and the overall consumer surplus SW CS (1.A) 1 1 whch equals SW {[ a q q n( y y )] q cq } ( q q ) n( y y ) 1 1 { a q q n( y y ) 1 1 q cq } (1.A bs) whle the CSR prvate frms maxmzes 7 Ths result also seems to meet the sentment of the partcpants n a debate organzed by the Economst Intellgence Unt (013), n whch 75% of the contrbutors expressed the opnon that CSR gves companes a compettve advantage, and responsblty s a real busness ssue. 8 Notce that the assumpton of a decreasng returns to scale technology (quadratc costs) s common n the study of mxed duopoly to avod the appearance of a publc monopoly n the presence of lnear costs. De Fraa (1993, p.46, footnote 8) llustrates the ratonale for ths fndng: a smple lnear functonal form wth constant average and margnal cost leads to the unwelcome result that, f prvate and publc frms have the same cost, then only the publc frm produces all the output, forcng out of the market the prvate one.

7 W kcs (.A) that s ( q q ) n( y y ) 1 1 W { a q q n( y y ) 1 1 q cq } k (.A bs) where k [0,1] denotes, as usual, the level of socal engagement. Frms compete on the product market à la Cournot. Gven the obectve functons (1.S bs) and (.S bs), the equlbrum of the second stage of the game (the market game) must satsfy SW q W 0, 0 q y 1 1. From (3), after the usual mposton of the addtonal ratonal expectatons condtons, that s q 1 1 and y q, we obtan the reacton functons q 1 a (1 n) q 1nc, q a (1 n k) q1 (1 c) ( n k) (3.A) Solvng the system n (3.A), we obtan the fnal equlbrum output and proft: a(1 k c) q (4.A) 1 1 n c(3 n k) 4c q a( k c) (5.A) 1 n c(3 n k) 4c a c(1 c k) (6.A) 1 [1 n c(3 n k) 4 c ] a c k c c k ( )[(1 ) 3 ] (7.A) [1 n c(3 n k) 4 c ] As a consequence, the followng result holds: Result 1.A In a mxed duopoly, 1) the prvate frm engaged n CSR actvtes always generates profts; ) CSR actvtes always reduces the proft of the publc frm; however, the network externaltes have a postve effect on the publc frm s profts; 3) as for the prvate duopoly, f the network effect s suffcently ntense, there s always a threshold value k** below (above) whch the hgher k the hgher (lower) the proft of the prvate CSR frm s.

8 Fg.. Plot of the threshold curves 0 k for gven values ac 1. n the [ nk, ] space. Legend: The curve s drawn Proof: Ths result s proved by observng that 1) 0 f (1 c) (1 c) 3k 0 k, whch s always true because c 1; 3 ) 1 k [1 n c(3 n k) 4 c ] a c(1 c k)[(1 n)(1 4 c)] 3 (9.A) and 1 0 k[0,1] n[0,1) k, 1 0 k[0,1] n[0,1) n 3 ) 3 k [1 n c(3 n k) 4 c ] a c(1 4 c)[(1 n)(1 3 k) c(4k n)] (10.A) and 1 n(1 c) 0 k k** k 3(1 n ) 4 c. Fgure graphcally depcts ths result. Therefore, despte the presence of a publc frm, the key result n the man text s confrmed. However, notable dfferences arses. In fact, frst, the prvate frm earns postve profts whchever the level of CSR engagement s; second, the optmal CSR engagement s value of the prvate company exst for every level of the network effects. As a consequence the latter result renforces the possblty that CSR behavours may be proftable for the prvate shareholder s profts, showng that ths may be the case even for standard goods (.e. n the absence of network effect) provded that the prvate frm s competng wth a publc frm.

9 References Baron, D.P. (009) A Postve Theory of Moral Management, Socal Pressure, and Corporate Socal Performance Journal of Economcs and Management Strategy 18, Baron, D.P. (001) Prvate Poltcs, Corporate Socal Responsblty, and Integrated Strategy Journal of Economcs and Management Strategy 10, Bhattacharee, T. and R. Pal (014) Network externaltes and strategc manageral delegaton n Cournot duopoly: Is there a prsoners dlemma? Revew of Network Economcs 1, Benabou, R. and J. Trole (010) Indvdual and Corporate Socal Responsblty Economca 77, Chrco, A. and M. Scrmtore (013) Choosng prce or quantty? The role of delegaton and network externaltes Economcs Letters 11, De Fraa, G. (1993) Unons and wages n publc and prvate frms: a game-theoretc analyss Oxford Economc Papers 45, Fant, L. and D. Buccella (016) Barganng Agenda and Entry n a Unonsed Model wth Network Effects Italan Economc Journal, Goerng, G.E. (007) The strategc use of manageral ncentves n a non-proft frm mxed duopoly Manageral and Decson Economcs 8, Goerng, G.E. (008) Welfare mpacts of a non-proft frm n mxed commercal markets Economc Systems 3, Hoerng, S. (01) Strategc delegaton under prce competton and network effects Economcs Letters 117, Katz, M. and C. Shapro (1985) Network externaltes, competton, and compatblty Amercan Economc Revew 75, Kopel, M. and B. Brand (01) Socally responsble frms and endogenous choce of strategc ncentves Economc Modellng 9, KPMG (013) KPMG Survey of Corporate responsblty reportng 013 Avalable onlne at Lambertn, L. and A. Tamper (010) Corporate Socal Responsblty n a Mxed Olgopoly Department of Economcs, Unversty of Bologna workng paper number 73. Nakamura, Y. (013) Socal welfare under quantty competton and prce competton n a mxed duopoly wth network effects: an analyss Theoretcal Economcs Letters 3, Nurn, C. W. and G. Tan (010) Obtanng ntangble and tangble benefts from corporate socal responsblty Internatonal Revew of Busness Research Papers 6, Reputaton Insttute (015) 015 Global CSR RepTrak 100 Avalable onlne at uments\015-global-csr-reptrakresults.pdf&hash=f ae88db1e043e7417e9f057f83955bb dd8e &ext=.pdf Sptzeck, H. and E. G. Hansen (010) Stakeholder governance: how stakeholders nfluence corporate decson makng Corporate Governance:The Internatonal Journal of Busness n Socety 10, The Economst Intellgence Unt (013) The Corporatons and Communtes Debate Seres: CSR has nothng to do wth charty. March 4 th -March 15 th 013. A summary paper from the Economst Intellgence Unt.