The Dynamics Between Corporate Social Responsibility and Switching Costs in a Competitive Market

ABSTRACT This study examines how switching costs influence firms' strategic corporate social responsibility (CSR) investments within a Hotelling framework. We analyze two scenarios: exogenous (psychological) and endogenous (CSR‐driven) switching costs. Under exogenous ones, we show a counterintuitive result: The firm with the higher switching costs chooses a higher level of CSR, thereby securing a larger market share. For endogenous costs, two cases emerge. When firms have symmetric baseline switching costs (unrelated to CSR), CSR and switching costs act as complements, leading to equal CSR investments, identical switching costs, and equal market shares. Under the asymmetric case, CSR complements a firm's own baseline switching costs but substitutes for the rival's. The historically dominant firm maintains leadership through higher CSR only if the gap between the firms' baseline switching costs exceeds a critical threshold. Below this threshold, the rival firm gains dominance. Finally, we show that CSR acts both as a welfare‐enhancing strategy and as a mechanism enabling profitable behavior‐based price discrimination (BBPD). Relative to the no‐CSR scenario, we show that CSR increases both consumer surplus and social welfare when switching costs are treated as exogenous. When switching costs are instead modeled as endogenous and asymmetric, these welfare‐enhancing effects are also confirmed through numerical simulations. In contrast, under endogenous symmetric switching costs, welfare improvements are conditional: There exists a threshold for the efficiency scale below which consumer surplus and social welfare increase and above which both measures may decline.