The Profit-Maximizing Case for Corporate Social Responsibility in a Bilateral Monopoly

We analyze a stylized distribution channel (bilateral monopoly) model where an upstream manufacturer sells output to a downstream retailer. In a two-stage linear demand game setting, we show that a two-part contract, consisting of a wholesale price and corporate social responsibility (CSR) component, can be utilized by the manufacturer to fully coordinate and control its retailer. Thus, a CSR contract can be used in place of the traditional twopart tariff scheme (wholesale price and fixed franchise fee) to optimally coordinate the marketing channel. Our model provides a novel theoretical profit-maximizing rationale for the strategic use of CSR. Copyright (C) 2013 John Wiley & Sons, Ltd.