Price Competition and Cooperation on Sustainable Investments

Abstract

Competition policy is increasingly employed to orchestrate cooperative investment agreements in industries. This paper presents a theoretical model and experiment to investigate how potential cooperation between firms on corporate social responsibility (CSR) investments affects subsequent price competition. In an initial stage, duopolists make a binary sustainability investment decision (e.g., corresponding to waste and pollution reduction, energy efficient technology adoption, etc.) that affects their costs. Investment also shifts demand, as some consumers value sustainability. In later stages firms set prices simultaneously in a sequence of indefinitely repeated rounds. To investigate how cooperation in CSR investments affect price competition, in some treatments the sellers can communicate in the investment stage. The experiment implements communication using free-form chat or more restrictive messages focused on the investment decision in different treatments. These alternative communication treatments act as a proxy for the competition authorities’ ability to monitor and scrutinize firms’ cooperative investment agreements. Treatments also vary costs and demand so that either investment or noninvestment is a profit-maximizing strategy conditional on noncooperative pricing. The experimental results reveal that investment rates are significantly lower with rich communication than more limited communication treatments. Moreover, prices and firm profits tend to be higher when firms can freely exchange information, at the cost of lower consumer welfare. Joint paper with Timothy Cason and Takahiko Kiso.