Effect of Csr on Product Differentiation in the Presence of Cost Advantage

(ProQuest: ... denotes formulae omitted.)1.INTRODUCTIONIn recent times, Corporate Social Responsibility (CSR) has become an important part of corporate strategy. Many companies are establishing CSR as a separate functional area with its own objectives and policies. A majority of companies actually issue a CSR report annually. In 2011, 83% of top 100 US companies by revenue issued such report compared to 74% in 2008 and only 37% in 2005. Globally, this figure is 95% of the top 250 largest companies (KPMG 2011). Recently, the UN started a Global Compact Initiative for companies to pledge support for human rights, labor standards, and environmental protection. As a measure of success of this initiative, 8000 businesses around the world have signed this pledge (Knowledge@Wharton, 2012). Bateman and Snell (2002) defined CSR as a set of corporate actions that positively affects an identifiable social stakeholder's interests and does not violate the legitimate claims of another identifiable social stakeholder. CSR activities should do some social good and should be beyond that is required by law (McWilliams and Siegel, 2001). They also say that CSR activities would increase the social utilities of the companies' activities. Common examples include recycling, pollution reduction and product design that have social attributes and characteristics.Product differentiation is another corporate strategy that is pursued by some companies in order to offer a distinctive product in the market to avoid competition, charge premium price, and increase profit. Usually, when the products are less differentiated in a particular industry, the firms therein will encounter more intense competition. A common tool for depicting product differentiation in a duopoly is to use the Hotelling's Principle. Hotelling considers a stretch of physical street of finite length along which customers are uniformly distributed. Two shops are deciding about the physical location along the street. Assuming that customers will choose the nearest shop, Hotelling's law predicts that both shops will find themselves next to each other at the halfway point. This law has been applied to product differentiation in some characteristic of the product, for example color, sweetness or size. Applying Hotelling's law will mean that, given price and all other product attribu tes remaining the same, the characteristic in question will eventually be the same for both products making them identical to each other. In our paper, we use an "augmented version", called the SPD (Spatial Price Discrimination) model. In this model, a firm charges consumers different prices according to different locations. For markets with differentiated products or large transportation costs, spatial price discrimination is an important and useful strategy for firms. Greenhut (1981) conducted a survey which showed that, in areas like the US, Europe and Japan where the transportation cost can be as high as five percent of the total cost such price discrimination is definitely resorted to. For example, in the ready-mixed concrete market, a producer could observe each customer's location and then charge different prices. In addition to the transportation of this kind of bulky product, spatial model could also be applied to horizontal differentiation. As long as producers can identify the location, (for example, taste), price discrimination would exist. Breakfast cereals vary in sweetness; airlines choose different flight time in a day. As a result, many studies in literature used this model to analyze various questions concerning both firm' best strategy and social policy.While product differentiation strategy makes a firm's product different from others', the firms are also increasingly adopting CSR for improving their image. The research question studied in this paper is: Is there any link between a firm's CSR strategy and its product differentiation strategy? There are some anecdotal connections shown in popular media which shows that high CSR-intensive industries are often associated with low product differentiation. …