Abstract/Summary

In a duopoly model of vertical differentiation, we study market equilibrium and the resulting social welfare following an increase in the consumer's willingness to pay (WTP) for products sold by socially responsible manufacturers. Different types of such changes emerge depending on their effects on consumer heterogeneity. We show that, in most cases, increases in the consumers' social consciousness yield higher profits to socially responsible firms and may lead to higher levels of social welfare, provided that the market structure is left unchanged. However, when an increase in the consumer's social consciousness changes the market structure, welfare may fall, while the duopolists' profits rise. The resulting tension between private and social interest calls for a cautious attitude toward information campaigns aimed at increasing the consumer's social consciousness.