In this paper we outline a model of horizontal product differentiation where two duopolists – a profit maximising producer (PMP) and a “socially responsible” “fair trader” (FT) producer – compete over prices and (costly) “socially and environmentally responsible” features of their products. We analyse the optimal PMP reaction in price and location on the “social responsibility segment” under the assumption hat consumers have quadratic costs in buying a product which is below their own ethical standard.
We show that, when consumers’ perceived costs of ethical distance are high enough, PMP’s partial ethical imitation is part of his optimal reaction under different theoretical frameworks.
We finally evaluate deviations of PMP and FT price-location choices from social optimum, finding that – even though FT’s entry represents a Pareto improvement for consumers in the North – strategic complementarity between prices and ethical location leads to prices and location which are above domestic (but not necessarily international) social optimum in all the considered games.
Keywords: horizontal differentiation, social responsibility, social welfare
JEL Numbers: L13, L31