Endogenous Market Structure With Upstream Corporate Social Responsibility

ABSTRACT Firms in many industries engage in corporate social responsibility (CSR). We consider a vertical market with one upstream firm committed to CSR and two downstream firms providing differentiated goods, and analyze the endogenous market structure (Cournot, Bertrand, or Cournot–Bertrand competition) between the downstream firms. Contrary to conventional wisdom, we show that Bertrand competition emerges in the downstream market when the degree of upstream CSR is high. Under Bertrand competition, consumer surplus is larger, and the upstream firm with CSR prioritizes consumer surplus, which results in a lower input price. Consequently, the downstream firms earn higher profits under Bertrand competition.