The dynamics of socially responsible product differentiation and the habit formation of socially responsible consumers

In our model of socially responsible (SR) product differentiation two duopolists (a zero profit socially concerned producer and a profit maximizing producer) compete over prices and (costly) “socially and environmentally responsible” features of their products under a given law of motion of consumer’s habits. In a continuous time model in which the location of the zero profit socially responsible entrant is fixed and the profit maximizing producer (PMP) limits himself to price competition without SR imitation, we show that the optimal dynamic PMP’s price is always lower than his optimal static price since the PMP knows that, by leaving too much market share to his competitor, he will reinforce the habit of socially responsible consumption and loose further market share in the future. We also inspect the properties of equilibria when the PMP can imitate the entrant’s SR and we find that, in this case, the threshold triggering a PMP strategy of SR imitation and minimum price differentiation is higher in the dynamic than in the static case, depending on the PMP’s shadow cost of changes in consumer social responsibility.