Profitability of corporate social responsibility in network industries

The present paper shows that, when firms compete in a non-cooperative way on the level of corporate social responsibility (CSR) in network industries, the conventional result of the prisoner’s dilemma structure of the game in standard industries—i.e. to have social concerns is the Nash equilibrium, but it is harmful for firms’ profits—vanishes and, for sufficiently intense network externalities, the equilibrium in which both firms have social concerns is more profitable than simple profit-seeking. Moreover, we show that—when firms cooperate in choosing the profit-maximising level of social concerns—a profit-maximising CSR level does exist, provided that network effects are sufficiently strong. Therefore, in network industries, firms may obtain higher profits engaging in—cooperatively as well as non-cooperatively—CSR activities, showing that firms’ social concerns may be motivated by the owners’ selfish behaviour. Finally, a counter-intuitive result as regards consumer’s surplus and social welfare is obtained: those are always higher under competitive than cooperative choice of CSR because the level of CSR activities is higher in the former case. However, given that firms gain their largest profits with the cooperative choice of CSR, a Pareto-superior outcome is not reached.