Moral Preferences, Certification and Welfare in a Cournot Differentiated Duopoly

Abstract Standard theory predicts that higher marginal costs reduce firm profitability. This paper studies how consumer moral preferences affect competition and welfare in a differentiated Cournot duopoly with certification. Firms may incur higher marginal costs by adopting morally desirable production practices, and consumers value the associated moral quality. When moral valuation is sufficiently strong, a higher marginal cost can increase a firm’s equilibrium profit even under linear demand, as the induced increase in willingness to pay outweighs the direct cost effect. Introducing certification strengthens the demand response by verifying moral quality but imposes a compliance requirement, thereby tightening the conditions under which higher costs are profit-enhancing. When moral valuation is strong, higher moral costs can also raise consumer surplus and social welfare.