New Rationale for Corporate Social Responsibility: Price Discrimination

MEDIA CONTACT: Jim Hellegaard
561-319-2233, jhellegaard@fau.edu

Suman Ghosh, Florida Atlantic University professor, comments on the intersection of law and economics

BOCA RATON, Fla. (Oct. 8, 2018) – There’s a new rationale for why firms engage in Corporate Social Responsibility (CSR), one in which the firm agrees to donate a portion of private good revenue to charity.

Price discrimination is a pricing strategy that charges customers different prices for the same product or service. Based on our research, my colleagues and I argue that linking charitable donations to private good purchase allows the firm to price discriminate between consumers with different altruistic propensities. Consider a market where some consumers receive altruistic utility from donating to charity while others do not. Although both consumer groups have the same intrinsic value for the private good, altruistic consumers have less residual income left for spending on the private good relative to non-altruistic consumers. This drives a wedge in their private good demand and forces the seller to subsidize non-altruistic consumers.

The charity-linked good that ties private good purchase to charity effectively allows the seller to discount the price paid by altruistic consumers while keeping the private good price paid by non-altruistic consumers high. As a result, the firm may be able to increase revenues over non-altruistic consumers enough to make the charity-linked good profitable.

We also examine the implications of CSR on donations and profitability when consumers can

donate both directly out of their income and through their purchase of the charity-linked good. We show that the profitability of CSR now depends on how altruistic consumers value each dollar of donation through the charity-linked good relative to a dollar of direct donations.

If consumers are indifferent to the channel of donation, then CSR is not profitable. However, if the firm can increase the value of CSR donations by making consumer altruism public, the value of a dollar donation through the charity-linked good increases relative to a dollar donated directly out of income. Linked donations crowd out direct donations by the altruistic group and hence charitable contributions from this group decrease with this form of CSR.

Suman Ghosh is a professor of economics and Stone Fellow at Florida Atlantic University's College of Business. The opinions expressed in this article are those of the author and do not reflect or represent the opinions of Florida Atlantic University.