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Corporate Social Responsibility Strategy, Environment and Energy Policy
Accepted Manuscript Title: Corporate Social Responsibility Strategy, Environment and Energy Policy Authors: Angela C. Chao, Lucheng Hong PII: DOI: Reference:
S0954-349X(18)30330-8 https://doi.org/10.1016/j.strueco.2018.11.010 STRECO 772
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Please cite this article as: Chao AC, Hong L, Corporate Social Responsibility Strategy, Environment and Energy Policy, Structural Change and Economic Dynamics (2018), https://doi.org/10.1016/j.strueco.2018.11.010 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
Corporate Social Responsibility Strategy, Environment and Energy Policy
Angela C. Chao 1*, Lucheng Hong 2
1
School of Management and Economics, Southeast University, Nanjing 210096, Jiangsu,
2
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China; School of Electrical Engineering, Southeast University, Nanjing 210096, Jiangsu, China;
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[email protected];
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* Correspondence: [email protected] ; Tel.: +86-138-158-99407
This paper argue that firm endogenizes the consumer-friendly behavior by means of adopting eco-R&D to realize sustainable growth.If a firm focuses on a broader social objective and CSR as inborn factors of decision behaviors, will this bring a “win–win’’ for business as well as for the environment. Social welfare increases with a higher tax rate, for the firm undertaking social responsibility, the energy tax will increase either production or profit, but decrease consumer surplus. In contrast, for the other firms, the energy tax rate is opposite to their profit. If the rate of energy tax is not redundant, both prices of Low-energy-consuming products and common product will be reduced, resulting in a more conspicuous cost advantage to the firm adopting eco-R&D.
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Research Highlights
Abstract:
This paper investigates corporate social responsibility activities within the environmental
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realm, with particular focus on the case of energy industry. Comparing corporate social responsibility strategies in a differentiated duopoly with substitute products and eco-R&D, it shows that consumer-friendliness are significant, both production and profit will increase when the energy tax is imposed, but consumer surplus will decrease. Furthermore, if the rate of energy tax is not redundant, both prices of Low-energy-consuming products and common product will be reduced, resulting in a more conspicuous cost advantage to the firm adopting eco-R&D.
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Keywords: Corporate Social Responsibility; Ecological-R&D; Energy Policy 1. Introduction In recent years, the
ecological environment keeps deteriorating and environmental
problems are receiving global increasing attentions[1]. As major participants in high-speed economic growth, corporations occupy an important part not only in economy but also in
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almost every social aspect. The way of corporation behavior is affected by outside factors, like industries, market structures and policies, such behaviors will in turn affect the whole
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social welfare indirectly. Meanwhile, the concept of consumption changes as environmental conditions deteriorate. Consumers gradually acknowledge the environment-friendly
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economic models. In this context, corporate social responsibilities (CSR) has been
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increasingly more prominent within corporations, governments and consumers[2].
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Undoubtedly, corporate nature is the key factor that determines corporate objectives, and the
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objective is the key factor that determines corporate behaviors. Thus, state-owned corporations exhibit a different CSR behavior than that shown by private corporations[3].
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CSR is the best indicator for commercial morals of owner or manager of corporations. It deserves to be noted that more than half of the corporations in the world disclosed
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CSR-related information in the annual financial reports. When making investment, 59% of
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the transnational corporations require stakeholders to provide their CSR for credibility (KPMG, 2013). Corporate Social Responsibility Report of State Grid 2000 was released in Beijing On Feb. 16, 2011, the first CSR Report (CSRR) by a Chinese corporation in the 12th
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Five-Year Plan. Then, increasing number of key state-owned key corporations had voluntarily released their CSRR’s as an important channel to disclose their CSR information. By the end of 2013, 98.3% state-owned corporations had released their CSRR in the name of the groups or the only the listed companies[4]. The consumer has a greater initiative in experiencing the economy, hence the corporation has to pay more attention to its reputation.
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Moreover, it is also possible to reduce the burden on the environment by guiding the micro-decision of the corporation through mechanism design of the government. As Milton Friedman said, CSR is conservative by nature, and he believed that corporations and society are separated and could only be connected through responsibilities[5]. This paper discusses the following questions through theoretical and
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empirical research, these include questions, such as, what a corporation pursues is not merely for profit but also consumers’ recognition, then, should CSR be categorized as a part of cost
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or strategies? Will CSR affect corporate welfare, and if so, what is the mechanism? If a firm
focuses on a broader social objective and include green innovation and CSR as inborn factors
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of decision behaviors, will this bring a ‘‘win–win’’ for the business as well as for the
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environment? We also argue that the firm that wins the market, maximizing both consumer
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surplus and social welfare, is by no means a zero-sum game. In this paper, combining the
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CSR, environmental problems and the industrial policy together, has been regarded to be a growing trend for dealing with corporate growth and competition. It is far more than a
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necessity to develop a model that can quantize this trilateral relationship. A marginal contribution made in this paper is the attempt to build CSR-based duopolistic model, and
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provide theoretical evidence for corporations to endogenize the micro-behaviors of CSR and
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eco-R&D, to take up social responsibilities and to realize sustainable growth. The rest of this paper is organized as follows. Section 2 describes research status. Section
3 discusses the theoretical model. Section 4 specifies the simulation model, and Section 5
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provides conclusions and suggestions. 2. Literature Review There seemed to be a conflicting view on the relationship between the CSR and the corporate financial performance. This is both theoretically interesting and empirically relevant. Neo-classical economics regards the corporation as perfect rationality, who will pursue a maximum profit with scarce resources. The long debate that followed, regarding the
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effect of these theories, have produced controversial and paradoxical results (Friedman, 1970 [5]; Freeman, 1984 [6]; Carroll, 1979, 1991 [7-8]). While previous research emphasises that the importance of corporate objectives for profit and social responsibilities have internal tension, i.e. the two are powers of opposite directions but support each other, however, corporations should be involved in CSR. Additionally, the conception of CSR is limited,
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where CSR is simply considered as participation in charity activities and a component of a necessary cost but the long-term strategic advantage brought along by CSR is ignored.
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Therefore it is cannot be endogenized based on stakeholder theory[9]. In contrast, Carroll,
highlighting a differential viewpoint, brought stakeholders into the CSR frame, proposing a new conception frame of CSR. Wang & Juslin [10-11] established a theoretical model to
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measure how a firm’s CSR is influenced by human values. It also tests to what extent the
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consumers’ perceptions of CSR act as a predictor of perceptions of CSR. Porter & Kramer[12]
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systematically analyzed relationship between competitive advantages and CSR, and illustrated how corporations made competitive strategies to find chances to realize CSR and
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attain a long-term competitive advantages. Ya-Chin Wang[13] explore how government’s industrial policy and firm’s R&D investment are affected by the strategy of foreign exporting
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firms under cooperative and non-cooperative R&D commitments in an international rivalry
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market. Liu et al [14] pointed out corporations can achieve certificates from an NGO (Non-Government Organization) which encourage them to take environmental corporate social responsibilities (ECSR). The certificate standard is higher in the cournot duopoly than
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in the bertrand duopoly model, and more importantly, corporations and consumers can both reap from the profit of ECSR. However, others believe that CSR activities lead to less production and profit. Porter and Kramer attribute this to the fact that corporations regard social responsibilities only as a part of cost but not of strategic policies . Especially in the buyers’ market, consumers preference will be included in the corporations’ objective
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function. Thus, if the corporation’s strategic policies are altruistic or consumers-beneficial, we can view CSR as a managerial policy and potentially analyze economic efficiency. As there is a relationship among the CSR, environment and policy, some literatures researched whether or not corporations took to ECSR in a differential duopolistic market. Through building a game theoretical model, they analyzed various three-stage static games
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with price competition and quantity competition in duopoly. They looked at the process
through which oligopolies made profit, its benefits for the whole society, and illustrated how
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the corporate social responsibilities affected environment[15]. Corporations initially involved in ECSR have more advantage and are more likely to win more profit in the price competition, which in turn reinforces corporations attach important to consumer-friendly.
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Through a two-stage games, Kosuke Hirose(2006) demonstrated that although corporations’
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taking up ECSR would eliminate the negative externality and increase the whole social
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welfare, they would also lose consumer surplus. Abraham Lioui et al[16] pointed out the ECSR strategy has indirect impact on corporate financial performance,by corporate
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operational and financial data,. The impact was conspicuously positive if corporations took up ECSR and invested in green innovations at the same time. However, the CSR’s vary as the
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market structures vary. With regards to the problem of how corporations took up CSR in the
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duopoly market. Research on the relationship between environment and CSR, concluding the implications of ECSR, the effect on corporate performance, consumer surplus and social welfare, and the effect on environment[17-18]. Most studies agree that ECSR will promote an
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overall social welfare and improve the environment. Li[18] constructed an equilibrium analysis model for CSR in different market structures, offering a more comprehensive explanation. In general, the literature provided numerous perspectives on sustainable energy and ECSR. However these studies are mainly concerned the impacts of firm behavior on environment regulations in mixed oligopoly[11][20-21]. Nowadays, with the rapid development
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of economy, the ecological environment is deteriorating, and the sustainable development calls for the innovation of green technology[22]. The firm that anticipates the ecological innovation, consumer-friendliness
are significant in return. In this paper, which is necessary to
focus on the firms’ motivation for adopting CSR in different scenario of energy policy. So we define the strategic CSR behavior such as eco-R&D and green technology management, as
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environmental CSR, conducted to improve their reputation.
To the best knowledge, the previous studies on strategic CSR has not yet tackled CSR as
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a device for an incumbent to respond to industrial policy. Moreover, they assume that public firm non-profit maximizing but symmetric cost among the firms’ objectives matters. This
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paper investigates an asymmetric profit-maximizing objective to check whether the
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incumbent firm has an incentive to adopt cost-reducing R&D activities as a response to
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corporate social responsibility. As the efficiency is improved by means of eco-R&D, the
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price and marginal cost decreases drastically. If the energy tax increases, both prices of LEC and common product will raise. This is consistent with previous research and reports that
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states the current status of CSR awareness in Asia. 3. Models and Analysis
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In this section, the basic assumptions are first introduced. A three-stage
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simultaneous-move game has been constructed consisting of the government and firms. In the first stage，the government chooses degree of energy tax to maximize the social welfare. In the second stage，firms choose strategy weather undertaking CSR. In the last stage, each
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firms choose their outputs to maximize their objective function, respectively. Backward induction is utilized to derive the sub-game perfect Nash equilibrium. At last, four critical propositions for analysis are put forward according to the game model and the proofs have been provided respectively. 2.1. Assumptions
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Our analysis relies on the assumption that private profit-seeking firm have incentive to takeoff CSR by means of adopting eco-R&D. The perspectives of CSR have evolved from whether CSR should exist to why it does exist and how it affects the economy. Consider a duopolistic market where firm 1 and firm 2 produce homogeneous goods. Most of energy sector comprises enterprises that provides oil crude producers, oil well equipments, gas
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pipelines, electricity and gas distribution which stand for the state-owned enterprise lying in the upstream of the industrial value chain in China. Furthermore it is obviously that there is
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a trade-off between consumer surplus and environmental damage in generating social welfare in the polluting industry. The following assumptions are given in Duopoly.
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(1) Suppose firm 1 is able to invest in eco-R&D and provides production q1 at price P1
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while firm 2 adopts a high-energy-efficiency technique and provides the production q2 at
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price P2.Since the technique cost for improving the energy efficiency is a strict increasing
higher cost than firm 1, i.e. C1
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function in terms of the increment extent of the energy efficiency, firm 2 has to bear a
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(2) Suppose government affects the firm behavior and performance by regulating energy taxes with the ratio of H(e). A higher H(e) means more energy can be consumed.
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When H(e)=0, the energy tax will be imposed at a fixed rate t, where the base is the total
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corporate energy consumption; when H(e)=1, no energy tax will be imposed. (3) Consumers are concerned about the firm’s behavior. In other words, consumers can
make choices according to their preference, that is, the environmental effect by its
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production is involved in the consumers’ utility function. Additionally, consumers will also pay attention to corporate reputation. When lower-energy-consuming products have a price close to that of common products, the degree of consumer-friendliness is significant. With regards to this, assume the environment-friendly index as ρ, measuring the product’s pollution extent on environment. When the environment-friendly index ρ
increases, the
product’s marginal cost decreases and the ratio of decrease is φ, ρ(ρ0, ρn). Additionally,
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the index distribution follows a lack-of-memory pattern. In other words, the pollution extent is independent of the utilization period of a technique. 2.2. Research Model In this paper, it is assumed with different energy efficiencies, the pollution efficiencies
f ( ) e
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vary and follow the exponential distribution.
(1)
Where, λ is the improvement index of low-energy efficiency, e is the energy
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consumption to produce a common product. The relationship between product prices of firm 1 and firm 2 can be written as:
(2)
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P2 P1 L ( 0 )
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Where, L is the stepwise difference in price for low-energy product, indicating that
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with every one-unit decrease in energy consumption, the final product price will increase L.
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P1 and P2 are the price of firm 1 and firm 2, respectively. Environment-friendly index denotes ρ, This parameter also quantitatively rates consumers’ preference of
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low-energy-consuming (LEC) products. On the contrary, consumers will purchase common
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products. With prices’ variance, the critical point in consumers’ preference for environment-friendly products is given by:
*
P2 P1
0
L
,which is the turning point for
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consumers’ preference. With purchase of firm 1’s products, consumer surplus is given by:
C S1
*
L(
0 ) P1 e
d ( 2 P1 P2 ) e
(
P2 P1 L
0 )
P1 e
0
(3)
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0
Similarly, with purchase of firm 2’s products, consumer surplus is given by: n
CS2
L(
0 ) P2 e
d （ P2 L n L 0） e
*
The demand for common products is q1,
n
P1 e
(
P2 P1 L
0 )
(4)
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*
q1 N
e
d Ne
0
0
( P2 P1 ) L 1 e
(5)
The demand for LEC products is q2=N- q1,
*
e
q2 N N
0
0 ( P2 P1 ) 0 L d N 1 e e
(6)
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Where, N is the fixed market quota. q1 and q2 are the output of firm 1 and firm 2, respectively.
1 ( P1 C 1 ) q 1 (1 H ( e )) e1 q 1 t
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Thus, the objective functions for two firms are given below respectively,
2 P2 C 2 ( 0 ) q 2 (1 H ( e )) e1 q 2 t (1 )
1
2
(7) (8)
2
N
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Each firm optimizes its objective function with respect to P1 and P2，respectively, and
*
P2 1 e *
0
L
C 1 e 1 t (1 H ( e ) )
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2L
P1
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the following first-order conditions are:
C 2 ( 0 ) (1 H ( e )) e 1 t (1 )
(9) (10)
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The objective function of the government is maximum social welfare, formulating the
is defined as
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market access threshold to LEC techniques and tax rate of energy tax. Then social welfare
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SW
i 1,2
CS
i (1 H ( e ) ) e 1 q 1 t (1 H ( e ) ) e 2 q 2 t
(11)
i 1,2
Where π1 represents the profit of duopoly firms.
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In this way，the three-stage simultaneous-move game has been constructed. Deducing
the first derivatives to C2 and C1 in equations (9) and (10) respectively, P1
*
C 2
P2
*
C1
0
Deducing the first derivatives to λ in equations (9) and (10) respectively,
(12)
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P1
*
2L
P2
*
L
1
2
1
2
0
(13)
0
(14)
According to equations (13) and (14), as the low-energy efficiency index λ increases,
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product prices of both Corporation 1 and Corporation 2 decrease. And as λ increases, the marginal cost of the corporation’s products decreases increasingly faster, which leads to a
*
P2
*
, P1
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lower price and advantage gain in the corporation’s prices. Due to
P1
decreases more conspicuously than P2, which means Corporation 1 is more inclined to
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change to the LEC technique. Deducing the first derivatives to t in equations (9) and (10)
P2
e 1 (1 H ( e ) ) 0
(15)
(16)
e1 (1 H ( e ) ) (1 ) 0
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t
*
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t
*
M
P1
N
respectively,
According to equations (15) and (16), as the energy tax rate t increases, both prices of
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the LEC products and common products go higher. If the rate of energy tax is not
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redundant, high price can be avoided which will lead to a reduced consumers’ purchasing power and unmarketable product. In other words, LEC techniques can be incentive by the rate of energy tax . According to the model given above, we provided the following
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propositions:
Proposition1: In Duopoly, the price of one firm is independent of the resource cost of the other. The resource cost of each product is related to pricing. The technique factor in
production mainly determines whether the products are LEC and whether the price is high.
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Thus, the product price of each duopolistic corporation is independent of the resource cost of the other corporation.
Proposition 2: As efficiency is improved, P1 and the marginal cost decreases drastically. Given the conditions in Proposition 2, it is very simple to construct examples. If one
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firm adopts eco-R&D, then the varying marginal cost will reduce obviously. In this case, corresponding firm decrease the price consequently but the profit will not be damaged
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because the willingness of consumers to pay for low-energy-consuming. We can set to one by assumption which allows to relate this willingness to pay to the cost of CSR and the
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maximum willingness to pay for the CSR good relative to the willingness to pay of the
Proposition3: As the energy tax t increases, both prices of LEC and common product
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normalized LEC.
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will rise.
The conclusion is basically consistent with the view of Song.M et al[23], in which they
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argued that the correlativity among environmental efficiency, and particulate matter
Proof:
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efficiency to research the state of energy consumption.
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Both H(e) and μ are less than 1. Because the slope of the indifference curve equals to that of the budget curve, and the marginal rate of substitution (MRS21) equals to the absolute value of slope of the indifference curve and the budget curve, equation (17) can be
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deduced in the equilibrium point.
M R S 21
P2 P1
X1
(17)
X 2
Assume ΔL is the increment in the stepwise price. So if other variables remain constant, the increment in P1 is
2L
, and the increment in P2 is
L
. P2 has a slower
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increase than P1, which means the LEC product has a lower price than before and substitution is about to take place while consumers’ utility is not impaired. □ Gradually, with the government’s encouraging and promoting the energy policies, consumers’ growing consciousness of energy consumption and the steady increase in the relative price of common products, common product of firm 1 will lose it price advantage
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eventually and the LEC products will seize the market completely. Consequently, the following proposition is given:
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Proposition4: As the product’s LEC stepwise price L goes higher, prices of both the
common product and the LEC product go higher, but the increment in the LEC product
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is much slower, that is, the LEC product incurs a smaller effect. Now let’s determine
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each game player’s profit.
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Proof:
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Put P1* and P2* into equations (5)-(8) and we can have the optimal productions q1* and
e
L
*
*
( P2 P2 )
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q2* and the optimal profits π1* and π2*, Let
L p exp 1 e 0 C 2 C 1 ( 0 ) e 1 t (1 H ( e ) ) M L
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Then, the optimal productions are given, respectively,
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0 q1 N e (1 M ) * 0 0 Me ) q 2 N (1 e
*
(18)
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The optimal profits of two firms are given, respectively,
1 Ne *
* 2
N (1 e
0
Me
0
0
(1 M ) )(1
L
e
0
)
1
2
(19) □
2
In conclusion, when energy policies are given, the price is only positively correlated with resource cost but nothing to do with competitors. If the firm chooses to take partial CSR by voluntarily investing in R&D or improvement of technique to decrease its energy consumption, the energy efficiency will increase. The increased efficiency of energy
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utilization is positively proportional to the decline in the marginal cost of the LEC products. In other words, firm behavior has positive effect on its profit in the long-term. If the government imposes the energy tax, the product price goes high no matter whether the firm taking CSR or not. It also means when the government imposes the energy tax, the consumer surplus decreases, and the producer surplus decreases as well in the long term.
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The government can control product prices and productions by adjusting the rate of energy tax. Additionally, when the government implements the energy policies, the total
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productions decrease; and the whole society’s energy consumption decreases, which eventually improves the environment, since duopoly firms then take up partial CSR.
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4. Simulation Results
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The following assumptions were made in order to simply the model: (1) The government imposes the energy tax at a fixed rate, so we set H(e)=0, (2) The environment
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friendliness index of the common product and LEC product are ρ0=0.2, ρ=0.5, respectively, (3) The stepwise difference of the LEC product is
L=1, (4) The energy consumed to
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produce common products is e1=1, the energy decrease rate per unit product is given by μ=0.5, the decreases rate of the product cost is φ=0.1, the R&D coefficient is β=1, λ=1, and
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the energy tax rate t lies in (0, 1) with an interval of 0.0001. The results of the simulation
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were derived using MATLAB. 3.1. Customer surplus and energy policy Equations (3) and (4) were Simulated by the preset parameters. Shown in Figure 1,
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when purchasing LEC products, consumers have a significantly lower consumer surplus than when purchasing common products. Because consumers have to pay more to get the same amount of firm 2’s LEC products, however the consumers surplus is not sufficient enough for LEC products to improve environment. When the energy tax rate increases, the consumer surplus for purchasing LEC products increases and vice versa. When the tax rate is increased, firm 1 chooses to take CSR voluntarily, which reduces energy consumption to increases the
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environment friendliness to expand its market, and eventually leads to a higher consumer surplus. Meanwhile, which produces LEC products, firm 2 will undertake partial CSR, imposing the energy tax will only increase its product price but not change the product environment friendliness index, which leads to decrease consumer surplus. Based on this,
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22
-10
20
-12
CS1
CS2
18
-14
16 14 12
-16
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-18 -20 0
0.2 0.4 0.6 0.8 t (energy tax rate)
0
1
0.2 0.4 0.6 0.8 t (energy tax rate)
N
10 8
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corporations to take CSR without impairing the consumer surplus.
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when stipulating energy policies, the government should set an appropriate tax rate to direct
1
firm 2 vs the energy tax rate
M
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(b) (a) Figure 1. Simulation results of CS: (a) CS of firm 1 vs the energy tax rate; (b) CS of
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3.2. Firm Performance and energy policy According to the previous conditions, we ran the simulation of the third stage, by eq
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(5-6) and determine that the rate of production, with different tax rates t. The simulation
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result is shown in Figure 2. We can conclude: 1) with the preset parameters and the optimal price, common product production of firm 1 decreases when t increases, that is, firm 1 lost its price advantage and its production decreases. In contrast, the LEC production of firm 2
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increases when the energy tax is imposed, that is, the energy tax will lead to a higher price of common products and thus a higher competition ability of LEC products. Consequently, production of firm 2 will increases if t increases. The decision of optimal prices and productions in the energy policy, would be considered first. From Figure 3, the energy tax could promote a higher production rate of the LEC product, and the average environment
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friendliness index of the society would increases, which means that the energy policies can substantially improve the environment. 400 200
q1 q2
100 0 -100
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LEC Production
300
-200 0.2 0.4 0.6 0.8 t (energy tax rate)
1
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-300 0
Figure 2. Productions vs the energy tax rate
Obviously, the profit of oligopoly firm would be influenced by the industrial policy such
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as that of the energy tax rate. Simulating equations (7) and (8), the results are shown in
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Figure 2. If firm 1 does not take CSR and consumes more energy, more energy tax will be
A
levied which leads to a higher price, a lower production and consequently decreased total
M
profit. Meanwhile, profit of firm 2 increases as the energy tax rate increases, since the energy
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tax makes the price of common product rises at a higher speed than the LEC product. Thus, as the energy tax rate increases, firm 2 can reap a bigger share and a higher profit. Comparing
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the profits between oligopoly firms in the paper, the energy tax encourages the LEC corporations and beats the high-energy-consuming corporations. With an increased energy
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tax rate, the cost of CSR-not-taking firm will become increasingly higher. Meanwhile, from the perspective of the profit change trend of the firm, the LEC firm 2 reaps a higher profit
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with an increased energy tax rate t. Hereby, the energy tax rate will direct corporations to undertake CSR and reduce its energy consumption.
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350
-350
300
-400
250
π1
π2
-300
-450
200
-500
150
-550
100
-600
50 0.2 0.4 0.6 0.8 t (energy tax rate)
1
0
0.2 0.4 0.6 0.8 t (energy tax rate)
1
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0
(a) (b) Figure 3. Simulation results of profit: (a) Profit of firm 1 vs the energy tax rate; (b)
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Profit of firm 2 vs the energy tax rate 3.3. Social welfare and energy policy
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In the third stage, the government determine the social welfare through the energy
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policies. Simulate equation (11) and the result is shown in Figure 4. -160
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-170
M
-180
SW
-190 -200
0
0.2 0.4 0.6 0.8 t (energy tax rate)
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-230 -240
ED
-210 -220
1
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Figure 4. Social welfare vs the energy tax rate Social welfare increases with a higher tax rate t, where the production of firm 1
decreases, the production of firm 2 increases, and the consumer surplus decreases.
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Simultaneously, profit of firm 1 increases but firm 2’s become higher, and the tax revenue has a positive inclination. Generally, the social welfare increases. When more LEC products are provided in the market, the energy tax will not only increase the social welfare, but also restrain the pollution and improve the environment. However, the energy tax will cause the consumer surplus to decrease in the short term, so when stipulating the tax rate, the government should consider the substitution effect of the energy policy.
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In this paper, given policy scenario, such as adjustable energy tax, we argue the impacts of firm behavior of social welfare on firms’ incentive for undertaking the “doing well by doing good” strategy suggested by Baron [24]. Specifically, we extend the three-stage simultaneous game in which firms commit to undertake consumer friendly actions in the form of eco-R&D in the second stage and make their quantities decision in the last stage.
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Based on this, we also put forward policy recommendations for formulating energy policy
and guiding enterprises to undertake corporate social responsibility. Be´nabou & Tirole [25]
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give an overview of the recent developments in the economics of prosocial behavior and link it to CSR. Lambertini & Tampieri [26] also construct a static duopoly game, considering firms
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can choose between profit seeking or CSR and their emphasis is to characterize a mixed
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outcome (one profit seeking, the other CSR), which is stable for low impact of pollution and
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CSR sensitivity.
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Since the market was assumed to be fixed in this paper, that is, it was beyond consideration that the market would shrinks as a result of the levy of energy tax and the
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price would increase. It is quite probable that the energy tax would cause a drastic increase in price, and consumer would seek substitution for such products, which cause lower profit
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and tax revenue. In particular, suppose that the minimum level of environment CSR, for a
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firm eligible to receive a profit return, it is noteworthy that if a profit-seeking firm adopts the do well by doing good strategy, the firm has no incentive to undertake a level of CSR lower than the minimum since it would not be recognized by consumers.
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5. Conclusions and Remarks This paper investigated the incentives of firms for undertaking strategic CSR activities.
We define as voluntary CSR actions that enhance a firm's competitiveness and reputation. Due to the trade-off between social welfare and environmental damage, the government have to applicate industrial regulation, such as different energy tax of subsidy, to encourage the firm to take CSR voluntarily. In this paper, we proposed the oligopolies’ reaction in different
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scenario of energy policies, we investigate how the presence of energy policy influences an oligopoly firm with energy consumption. We find that oligopolies consider different energy policies and determine whether to take CSR by innovation. In accordance with Michelon[27], “it is necessary to clarify the complex relationship between CSR and Company performance”. The CSR firm obtains higher profit compared to the common-product firm.
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Therefore, the society will gain a higher quantity of LEC products and a better environment.
The energy tax rate changes in the same direction with the social welfare, but opposite, with
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consumer surplus. If a firm lower its energy consumption by eco-R&D ,voluntarily take
CSR, the tax cost will be decreased and it will have a long-term competitiveness because of
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the recognition by consumer . Noticeably, consumer prefer environment-friendly products.
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Additionally, the marginal cost of R&D in low-energy techniques decreases, as the
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production increases, the marginal cost of the LEC products decreases, which means that
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corporations can turn this short-term financial pressure into a long-term investment. In absence of other variable settings, energy tax is only policy instruments being
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considered, the behavior of other market structures has not been included in this paper. As the topics for future research, the variables should be expanded, the parameter design is
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more realistic, the research on other market structures is carried out, and research is
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conducted for specific industries. An investigation on how far this analysis can be extended to oligopolistic markets, that include a competitive fringe, is suggested. Oligopolistic CSR
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markets without an entry, could also be considered.
Author Contributions: The main contributions of Angela C. Chao are the theoretical model and literature review for this article. Hong Lucheng collected the data and empirical research to confirm the hypothesis in Section 3. Moreover, both authors discussed the intuitive explanation of the model, read and approved this version.
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Acknowledgments: The authors would like to thank two anonymous referees for their valuable comments.
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Conflicts of Interest: The authors declare that we have no conflicts of interest.
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S0954-349X(18)30330-8 https://doi.org/10.1016/j.strueco.2018.11.010 STRECO 772
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Received date: Revised date: Accepted date:
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Change
and
Economic
Dynamics
Please cite this article as: Chao AC, Hong L, Corporate Social Responsibility Strategy, Environment and Energy Policy, Structural Change and Economic Dynamics (2018), https://doi.org/10.1016/j.strueco.2018.11.010 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
Corporate Social Responsibility Strategy, Environment and Energy Policy
Angela C. Chao 1*, Lucheng Hong 2
1
School of Management and Economics, Southeast University, Nanjing 210096, Jiangsu,
2
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China; School of Electrical Engineering, Southeast University, Nanjing 210096, Jiangsu, China;
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[email protected];
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* Correspondence: [email protected] ; Tel.: +86-138-158-99407
This paper argue that firm endogenizes the consumer-friendly behavior by means of adopting eco-R&D to realize sustainable growth.If a firm focuses on a broader social objective and CSR as inborn factors of decision behaviors, will this bring a “win–win’’ for business as well as for the environment. Social welfare increases with a higher tax rate, for the firm undertaking social responsibility, the energy tax will increase either production or profit, but decrease consumer surplus. In contrast, for the other firms, the energy tax rate is opposite to their profit. If the rate of energy tax is not redundant, both prices of Low-energy-consuming products and common product will be reduced, resulting in a more conspicuous cost advantage to the firm adopting eco-R&D.
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Research Highlights
Abstract:
This paper investigates corporate social responsibility activities within the environmental
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realm, with particular focus on the case of energy industry. Comparing corporate social responsibility strategies in a differentiated duopoly with substitute products and eco-R&D, it shows that consumer-friendliness are significant, both production and profit will increase when the energy tax is imposed, but consumer surplus will decrease. Furthermore, if the rate of energy tax is not redundant, both prices of Low-energy-consuming products and common product will be reduced, resulting in a more conspicuous cost advantage to the firm adopting eco-R&D.
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Keywords: Corporate Social Responsibility; Ecological-R&D; Energy Policy 1. Introduction In recent years, the
ecological environment keeps deteriorating and environmental
problems are receiving global increasing attentions[1]. As major participants in high-speed economic growth, corporations occupy an important part not only in economy but also in
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almost every social aspect. The way of corporation behavior is affected by outside factors, like industries, market structures and policies, such behaviors will in turn affect the whole
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social welfare indirectly. Meanwhile, the concept of consumption changes as environmental conditions deteriorate. Consumers gradually acknowledge the environment-friendly
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economic models. In this context, corporate social responsibilities (CSR) has been
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increasingly more prominent within corporations, governments and consumers[2].
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Undoubtedly, corporate nature is the key factor that determines corporate objectives, and the
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objective is the key factor that determines corporate behaviors. Thus, state-owned corporations exhibit a different CSR behavior than that shown by private corporations[3].
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CSR is the best indicator for commercial morals of owner or manager of corporations. It deserves to be noted that more than half of the corporations in the world disclosed
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CSR-related information in the annual financial reports. When making investment, 59% of
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the transnational corporations require stakeholders to provide their CSR for credibility (KPMG, 2013). Corporate Social Responsibility Report of State Grid 2000 was released in Beijing On Feb. 16, 2011, the first CSR Report (CSRR) by a Chinese corporation in the 12th
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Five-Year Plan. Then, increasing number of key state-owned key corporations had voluntarily released their CSRR’s as an important channel to disclose their CSR information. By the end of 2013, 98.3% state-owned corporations had released their CSRR in the name of the groups or the only the listed companies[4]. The consumer has a greater initiative in experiencing the economy, hence the corporation has to pay more attention to its reputation.
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Moreover, it is also possible to reduce the burden on the environment by guiding the micro-decision of the corporation through mechanism design of the government. As Milton Friedman said, CSR is conservative by nature, and he believed that corporations and society are separated and could only be connected through responsibilities[5]. This paper discusses the following questions through theoretical and
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empirical research, these include questions, such as, what a corporation pursues is not merely for profit but also consumers’ recognition, then, should CSR be categorized as a part of cost
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or strategies? Will CSR affect corporate welfare, and if so, what is the mechanism? If a firm
focuses on a broader social objective and include green innovation and CSR as inborn factors
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of decision behaviors, will this bring a ‘‘win–win’’ for the business as well as for the
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environment? We also argue that the firm that wins the market, maximizing both consumer
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surplus and social welfare, is by no means a zero-sum game. In this paper, combining the
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CSR, environmental problems and the industrial policy together, has been regarded to be a growing trend for dealing with corporate growth and competition. It is far more than a
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necessity to develop a model that can quantize this trilateral relationship. A marginal contribution made in this paper is the attempt to build CSR-based duopolistic model, and
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provide theoretical evidence for corporations to endogenize the micro-behaviors of CSR and
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eco-R&D, to take up social responsibilities and to realize sustainable growth. The rest of this paper is organized as follows. Section 2 describes research status. Section
3 discusses the theoretical model. Section 4 specifies the simulation model, and Section 5
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provides conclusions and suggestions. 2. Literature Review There seemed to be a conflicting view on the relationship between the CSR and the corporate financial performance. This is both theoretically interesting and empirically relevant. Neo-classical economics regards the corporation as perfect rationality, who will pursue a maximum profit with scarce resources. The long debate that followed, regarding the
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effect of these theories, have produced controversial and paradoxical results (Friedman, 1970 [5]; Freeman, 1984 [6]; Carroll, 1979, 1991 [7-8]). While previous research emphasises that the importance of corporate objectives for profit and social responsibilities have internal tension, i.e. the two are powers of opposite directions but support each other, however, corporations should be involved in CSR. Additionally, the conception of CSR is limited,
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where CSR is simply considered as participation in charity activities and a component of a necessary cost but the long-term strategic advantage brought along by CSR is ignored.
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Therefore it is cannot be endogenized based on stakeholder theory[9]. In contrast, Carroll,
highlighting a differential viewpoint, brought stakeholders into the CSR frame, proposing a new conception frame of CSR. Wang & Juslin [10-11] established a theoretical model to
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measure how a firm’s CSR is influenced by human values. It also tests to what extent the
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consumers’ perceptions of CSR act as a predictor of perceptions of CSR. Porter & Kramer[12]
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systematically analyzed relationship between competitive advantages and CSR, and illustrated how corporations made competitive strategies to find chances to realize CSR and
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attain a long-term competitive advantages. Ya-Chin Wang[13] explore how government’s industrial policy and firm’s R&D investment are affected by the strategy of foreign exporting
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firms under cooperative and non-cooperative R&D commitments in an international rivalry
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market. Liu et al [14] pointed out corporations can achieve certificates from an NGO (Non-Government Organization) which encourage them to take environmental corporate social responsibilities (ECSR). The certificate standard is higher in the cournot duopoly than
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in the bertrand duopoly model, and more importantly, corporations and consumers can both reap from the profit of ECSR. However, others believe that CSR activities lead to less production and profit. Porter and Kramer attribute this to the fact that corporations regard social responsibilities only as a part of cost but not of strategic policies . Especially in the buyers’ market, consumers preference will be included in the corporations’ objective
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function. Thus, if the corporation’s strategic policies are altruistic or consumers-beneficial, we can view CSR as a managerial policy and potentially analyze economic efficiency. As there is a relationship among the CSR, environment and policy, some literatures researched whether or not corporations took to ECSR in a differential duopolistic market. Through building a game theoretical model, they analyzed various three-stage static games
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with price competition and quantity competition in duopoly. They looked at the process
through which oligopolies made profit, its benefits for the whole society, and illustrated how
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the corporate social responsibilities affected environment[15]. Corporations initially involved in ECSR have more advantage and are more likely to win more profit in the price competition, which in turn reinforces corporations attach important to consumer-friendly.
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Through a two-stage games, Kosuke Hirose(2006) demonstrated that although corporations’
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taking up ECSR would eliminate the negative externality and increase the whole social
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welfare, they would also lose consumer surplus. Abraham Lioui et al[16] pointed out the ECSR strategy has indirect impact on corporate financial performance,by corporate
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operational and financial data,. The impact was conspicuously positive if corporations took up ECSR and invested in green innovations at the same time. However, the CSR’s vary as the
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market structures vary. With regards to the problem of how corporations took up CSR in the
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duopoly market. Research on the relationship between environment and CSR, concluding the implications of ECSR, the effect on corporate performance, consumer surplus and social welfare, and the effect on environment[17-18]. Most studies agree that ECSR will promote an
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overall social welfare and improve the environment. Li[18] constructed an equilibrium analysis model for CSR in different market structures, offering a more comprehensive explanation. In general, the literature provided numerous perspectives on sustainable energy and ECSR. However these studies are mainly concerned the impacts of firm behavior on environment regulations in mixed oligopoly[11][20-21]. Nowadays, with the rapid development
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of economy, the ecological environment is deteriorating, and the sustainable development calls for the innovation of green technology[22]. The firm that anticipates the ecological innovation, consumer-friendliness
are significant in return. In this paper, which is necessary to
focus on the firms’ motivation for adopting CSR in different scenario of energy policy. So we define the strategic CSR behavior such as eco-R&D and green technology management, as
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environmental CSR, conducted to improve their reputation.
To the best knowledge, the previous studies on strategic CSR has not yet tackled CSR as
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a device for an incumbent to respond to industrial policy. Moreover, they assume that public firm non-profit maximizing but symmetric cost among the firms’ objectives matters. This
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paper investigates an asymmetric profit-maximizing objective to check whether the
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incumbent firm has an incentive to adopt cost-reducing R&D activities as a response to
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corporate social responsibility. As the efficiency is improved by means of eco-R&D, the
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price and marginal cost decreases drastically. If the energy tax increases, both prices of LEC and common product will raise. This is consistent with previous research and reports that
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states the current status of CSR awareness in Asia. 3. Models and Analysis
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In this section, the basic assumptions are first introduced. A three-stage
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simultaneous-move game has been constructed consisting of the government and firms. In the first stage，the government chooses degree of energy tax to maximize the social welfare. In the second stage，firms choose strategy weather undertaking CSR. In the last stage, each
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firms choose their outputs to maximize their objective function, respectively. Backward induction is utilized to derive the sub-game perfect Nash equilibrium. At last, four critical propositions for analysis are put forward according to the game model and the proofs have been provided respectively. 2.1. Assumptions
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Our analysis relies on the assumption that private profit-seeking firm have incentive to takeoff CSR by means of adopting eco-R&D. The perspectives of CSR have evolved from whether CSR should exist to why it does exist and how it affects the economy. Consider a duopolistic market where firm 1 and firm 2 produce homogeneous goods. Most of energy sector comprises enterprises that provides oil crude producers, oil well equipments, gas
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pipelines, electricity and gas distribution which stand for the state-owned enterprise lying in the upstream of the industrial value chain in China. Furthermore it is obviously that there is
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a trade-off between consumer surplus and environmental damage in generating social welfare in the polluting industry. The following assumptions are given in Duopoly.
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(1) Suppose firm 1 is able to invest in eco-R&D and provides production q1 at price P1
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while firm 2 adopts a high-energy-efficiency technique and provides the production q2 at
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price P2.Since the technique cost for improving the energy efficiency is a strict increasing
higher cost than firm 1, i.e. C1
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function in terms of the increment extent of the energy efficiency, firm 2 has to bear a
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(2) Suppose government affects the firm behavior and performance by regulating energy taxes with the ratio of H(e). A higher H(e) means more energy can be consumed.
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When H(e)=0, the energy tax will be imposed at a fixed rate t, where the base is the total
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corporate energy consumption; when H(e)=1, no energy tax will be imposed. (3) Consumers are concerned about the firm’s behavior. In other words, consumers can
make choices according to their preference, that is, the environmental effect by its
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production is involved in the consumers’ utility function. Additionally, consumers will also pay attention to corporate reputation. When lower-energy-consuming products have a price close to that of common products, the degree of consumer-friendliness is significant. With regards to this, assume the environment-friendly index as ρ, measuring the product’s pollution extent on environment. When the environment-friendly index ρ
increases, the
product’s marginal cost decreases and the ratio of decrease is φ, ρ(ρ0, ρn). Additionally,
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the index distribution follows a lack-of-memory pattern. In other words, the pollution extent is independent of the utilization period of a technique. 2.2. Research Model In this paper, it is assumed with different energy efficiencies, the pollution efficiencies
f ( ) e
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vary and follow the exponential distribution.
(1)
Where, λ is the improvement index of low-energy efficiency, e is the energy
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consumption to produce a common product. The relationship between product prices of firm 1 and firm 2 can be written as:
(2)
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P2 P1 L ( 0 )
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Where, L is the stepwise difference in price for low-energy product, indicating that
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with every one-unit decrease in energy consumption, the final product price will increase L.
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P1 and P2 are the price of firm 1 and firm 2, respectively. Environment-friendly index denotes ρ, This parameter also quantitatively rates consumers’ preference of
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low-energy-consuming (LEC) products. On the contrary, consumers will purchase common
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products. With prices’ variance, the critical point in consumers’ preference for environment-friendly products is given by:
*
P2 P1
0
L
,which is the turning point for
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consumers’ preference. With purchase of firm 1’s products, consumer surplus is given by:
C S1
*
L(
0 ) P1 e
d ( 2 P1 P2 ) e
(
P2 P1 L
0 )
P1 e
0
(3)
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0
Similarly, with purchase of firm 2’s products, consumer surplus is given by: n
CS2
L(
0 ) P2 e
d （ P2 L n L 0） e
*
The demand for common products is q1,
n
P1 e
(
P2 P1 L
0 )
(4)
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*
q1 N
e
d Ne
0
0
( P2 P1 ) L 1 e
(5)
The demand for LEC products is q2=N- q1,
*
e
q2 N N
0
0 ( P2 P1 ) 0 L d N 1 e e
(6)
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Where, N is the fixed market quota. q1 and q2 are the output of firm 1 and firm 2, respectively.
1 ( P1 C 1 ) q 1 (1 H ( e )) e1 q 1 t
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Thus, the objective functions for two firms are given below respectively,
2 P2 C 2 ( 0 ) q 2 (1 H ( e )) e1 q 2 t (1 )
1
2
(7) (8)
2
N
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Each firm optimizes its objective function with respect to P1 and P2，respectively, and
*
P2 1 e *
0
L
C 1 e 1 t (1 H ( e ) )
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2L
P1
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the following first-order conditions are:
C 2 ( 0 ) (1 H ( e )) e 1 t (1 )
(9) (10)
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The objective function of the government is maximum social welfare, formulating the
is defined as
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market access threshold to LEC techniques and tax rate of energy tax. Then social welfare
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SW
i 1,2
CS
i (1 H ( e ) ) e 1 q 1 t (1 H ( e ) ) e 2 q 2 t
(11)
i 1,2
Where π1 represents the profit of duopoly firms.
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In this way，the three-stage simultaneous-move game has been constructed. Deducing
the first derivatives to C2 and C1 in equations (9) and (10) respectively, P1
*
C 2
P2
*
C1
0
Deducing the first derivatives to λ in equations (9) and (10) respectively,
(12)
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P1
*
2L
P2
*
L
1
2
1
2
0
(13)
0
(14)
According to equations (13) and (14), as the low-energy efficiency index λ increases,
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product prices of both Corporation 1 and Corporation 2 decrease. And as λ increases, the marginal cost of the corporation’s products decreases increasingly faster, which leads to a
*
P2
*
, P1
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lower price and advantage gain in the corporation’s prices. Due to
P1
decreases more conspicuously than P2, which means Corporation 1 is more inclined to
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change to the LEC technique. Deducing the first derivatives to t in equations (9) and (10)
P2
e 1 (1 H ( e ) ) 0
(15)
(16)
e1 (1 H ( e ) ) (1 ) 0
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t
*
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t
*
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P1
N
respectively,
According to equations (15) and (16), as the energy tax rate t increases, both prices of
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the LEC products and common products go higher. If the rate of energy tax is not
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redundant, high price can be avoided which will lead to a reduced consumers’ purchasing power and unmarketable product. In other words, LEC techniques can be incentive by the rate of energy tax . According to the model given above, we provided the following
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propositions:
Proposition1: In Duopoly, the price of one firm is independent of the resource cost of the other. The resource cost of each product is related to pricing. The technique factor in
production mainly determines whether the products are LEC and whether the price is high.
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Thus, the product price of each duopolistic corporation is independent of the resource cost of the other corporation.
Proposition 2: As efficiency is improved, P1 and the marginal cost decreases drastically. Given the conditions in Proposition 2, it is very simple to construct examples. If one
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firm adopts eco-R&D, then the varying marginal cost will reduce obviously. In this case, corresponding firm decrease the price consequently but the profit will not be damaged
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because the willingness of consumers to pay for low-energy-consuming. We can set to one by assumption which allows to relate this willingness to pay to the cost of CSR and the
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maximum willingness to pay for the CSR good relative to the willingness to pay of the
Proposition3: As the energy tax t increases, both prices of LEC and common product
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normalized LEC.
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will rise.
The conclusion is basically consistent with the view of Song.M et al[23], in which they
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argued that the correlativity among environmental efficiency, and particulate matter
Proof:
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efficiency to research the state of energy consumption.
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Both H(e) and μ are less than 1. Because the slope of the indifference curve equals to that of the budget curve, and the marginal rate of substitution (MRS21) equals to the absolute value of slope of the indifference curve and the budget curve, equation (17) can be
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deduced in the equilibrium point.
M R S 21
P2 P1
X1
(17)
X 2
Assume ΔL is the increment in the stepwise price. So if other variables remain constant, the increment in P1 is
2L
, and the increment in P2 is
L
. P2 has a slower
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increase than P1, which means the LEC product has a lower price than before and substitution is about to take place while consumers’ utility is not impaired. □ Gradually, with the government’s encouraging and promoting the energy policies, consumers’ growing consciousness of energy consumption and the steady increase in the relative price of common products, common product of firm 1 will lose it price advantage
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eventually and the LEC products will seize the market completely. Consequently, the following proposition is given:
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Proposition4: As the product’s LEC stepwise price L goes higher, prices of both the
common product and the LEC product go higher, but the increment in the LEC product
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is much slower, that is, the LEC product incurs a smaller effect. Now let’s determine
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each game player’s profit.
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Proof:
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Put P1* and P2* into equations (5)-(8) and we can have the optimal productions q1* and
e
L
*
*
( P2 P2 )
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q2* and the optimal profits π1* and π2*, Let
L p exp 1 e 0 C 2 C 1 ( 0 ) e 1 t (1 H ( e ) ) M L
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Then, the optimal productions are given, respectively,
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0 q1 N e (1 M ) * 0 0 Me ) q 2 N (1 e
*
(18)
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The optimal profits of two firms are given, respectively,
1 Ne *
* 2
N (1 e
0
Me
0
0
(1 M ) )(1
L
e
0
)
1
2
(19) □
2
In conclusion, when energy policies are given, the price is only positively correlated with resource cost but nothing to do with competitors. If the firm chooses to take partial CSR by voluntarily investing in R&D or improvement of technique to decrease its energy consumption, the energy efficiency will increase. The increased efficiency of energy
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utilization is positively proportional to the decline in the marginal cost of the LEC products. In other words, firm behavior has positive effect on its profit in the long-term. If the government imposes the energy tax, the product price goes high no matter whether the firm taking CSR or not. It also means when the government imposes the energy tax, the consumer surplus decreases, and the producer surplus decreases as well in the long term.
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The government can control product prices and productions by adjusting the rate of energy tax. Additionally, when the government implements the energy policies, the total
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productions decrease; and the whole society’s energy consumption decreases, which eventually improves the environment, since duopoly firms then take up partial CSR.
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4. Simulation Results
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The following assumptions were made in order to simply the model: (1) The government imposes the energy tax at a fixed rate, so we set H(e)=0, (2) The environment
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friendliness index of the common product and LEC product are ρ0=0.2, ρ=0.5, respectively, (3) The stepwise difference of the LEC product is
L=1, (4) The energy consumed to
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produce common products is e1=1, the energy decrease rate per unit product is given by μ=0.5, the decreases rate of the product cost is φ=0.1, the R&D coefficient is β=1, λ=1, and
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the energy tax rate t lies in (0, 1) with an interval of 0.0001. The results of the simulation
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were derived using MATLAB. 3.1. Customer surplus and energy policy Equations (3) and (4) were Simulated by the preset parameters. Shown in Figure 1,
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when purchasing LEC products, consumers have a significantly lower consumer surplus than when purchasing common products. Because consumers have to pay more to get the same amount of firm 2’s LEC products, however the consumers surplus is not sufficient enough for LEC products to improve environment. When the energy tax rate increases, the consumer surplus for purchasing LEC products increases and vice versa. When the tax rate is increased, firm 1 chooses to take CSR voluntarily, which reduces energy consumption to increases the
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environment friendliness to expand its market, and eventually leads to a higher consumer surplus. Meanwhile, which produces LEC products, firm 2 will undertake partial CSR, imposing the energy tax will only increase its product price but not change the product environment friendliness index, which leads to decrease consumer surplus. Based on this,
24
-8
22
-10
20
-12
CS1
CS2
18
-14
16 14 12
-16
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-18 -20 0
0.2 0.4 0.6 0.8 t (energy tax rate)
0
1
0.2 0.4 0.6 0.8 t (energy tax rate)
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10 8
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corporations to take CSR without impairing the consumer surplus.
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when stipulating energy policies, the government should set an appropriate tax rate to direct
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firm 2 vs the energy tax rate
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(b) (a) Figure 1. Simulation results of CS: (a) CS of firm 1 vs the energy tax rate; (b) CS of
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3.2. Firm Performance and energy policy According to the previous conditions, we ran the simulation of the third stage, by eq
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(5-6) and determine that the rate of production, with different tax rates t. The simulation
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result is shown in Figure 2. We can conclude: 1) with the preset parameters and the optimal price, common product production of firm 1 decreases when t increases, that is, firm 1 lost its price advantage and its production decreases. In contrast, the LEC production of firm 2
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increases when the energy tax is imposed, that is, the energy tax will lead to a higher price of common products and thus a higher competition ability of LEC products. Consequently, production of firm 2 will increases if t increases. The decision of optimal prices and productions in the energy policy, would be considered first. From Figure 3, the energy tax could promote a higher production rate of the LEC product, and the average environment
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friendliness index of the society would increases, which means that the energy policies can substantially improve the environment. 400 200
q1 q2
100 0 -100
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LEC Production
300
-200 0.2 0.4 0.6 0.8 t (energy tax rate)
1
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-300 0
Figure 2. Productions vs the energy tax rate
Obviously, the profit of oligopoly firm would be influenced by the industrial policy such
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as that of the energy tax rate. Simulating equations (7) and (8), the results are shown in
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Figure 2. If firm 1 does not take CSR and consumes more energy, more energy tax will be
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levied which leads to a higher price, a lower production and consequently decreased total
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profit. Meanwhile, profit of firm 2 increases as the energy tax rate increases, since the energy
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tax makes the price of common product rises at a higher speed than the LEC product. Thus, as the energy tax rate increases, firm 2 can reap a bigger share and a higher profit. Comparing
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the profits between oligopoly firms in the paper, the energy tax encourages the LEC corporations and beats the high-energy-consuming corporations. With an increased energy
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tax rate, the cost of CSR-not-taking firm will become increasingly higher. Meanwhile, from the perspective of the profit change trend of the firm, the LEC firm 2 reaps a higher profit
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with an increased energy tax rate t. Hereby, the energy tax rate will direct corporations to undertake CSR and reduce its energy consumption.
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350
-350
300
-400
250
π1
π2
-300
-450
200
-500
150
-550
100
-600
50 0.2 0.4 0.6 0.8 t (energy tax rate)
1
0
0.2 0.4 0.6 0.8 t (energy tax rate)
1
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0
(a) (b) Figure 3. Simulation results of profit: (a) Profit of firm 1 vs the energy tax rate; (b)
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Profit of firm 2 vs the energy tax rate 3.3. Social welfare and energy policy
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In the third stage, the government determine the social welfare through the energy
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policies. Simulate equation (11) and the result is shown in Figure 4. -160
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-170
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-180
SW
-190 -200
0
0.2 0.4 0.6 0.8 t (energy tax rate)
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-230 -240
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-210 -220
1
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Figure 4. Social welfare vs the energy tax rate Social welfare increases with a higher tax rate t, where the production of firm 1
decreases, the production of firm 2 increases, and the consumer surplus decreases.
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Simultaneously, profit of firm 1 increases but firm 2’s become higher, and the tax revenue has a positive inclination. Generally, the social welfare increases. When more LEC products are provided in the market, the energy tax will not only increase the social welfare, but also restrain the pollution and improve the environment. However, the energy tax will cause the consumer surplus to decrease in the short term, so when stipulating the tax rate, the government should consider the substitution effect of the energy policy.
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In this paper, given policy scenario, such as adjustable energy tax, we argue the impacts of firm behavior of social welfare on firms’ incentive for undertaking the “doing well by doing good” strategy suggested by Baron [24]. Specifically, we extend the three-stage simultaneous game in which firms commit to undertake consumer friendly actions in the form of eco-R&D in the second stage and make their quantities decision in the last stage.
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Based on this, we also put forward policy recommendations for formulating energy policy
and guiding enterprises to undertake corporate social responsibility. Be´nabou & Tirole [25]
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give an overview of the recent developments in the economics of prosocial behavior and link it to CSR. Lambertini & Tampieri [26] also construct a static duopoly game, considering firms
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can choose between profit seeking or CSR and their emphasis is to characterize a mixed
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outcome (one profit seeking, the other CSR), which is stable for low impact of pollution and
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CSR sensitivity.
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Since the market was assumed to be fixed in this paper, that is, it was beyond consideration that the market would shrinks as a result of the levy of energy tax and the
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price would increase. It is quite probable that the energy tax would cause a drastic increase in price, and consumer would seek substitution for such products, which cause lower profit
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and tax revenue. In particular, suppose that the minimum level of environment CSR, for a
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firm eligible to receive a profit return, it is noteworthy that if a profit-seeking firm adopts the do well by doing good strategy, the firm has no incentive to undertake a level of CSR lower than the minimum since it would not be recognized by consumers.
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5. Conclusions and Remarks This paper investigated the incentives of firms for undertaking strategic CSR activities.
We define as voluntary CSR actions that enhance a firm's competitiveness and reputation. Due to the trade-off between social welfare and environmental damage, the government have to applicate industrial regulation, such as different energy tax of subsidy, to encourage the firm to take CSR voluntarily. In this paper, we proposed the oligopolies’ reaction in different
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scenario of energy policies, we investigate how the presence of energy policy influences an oligopoly firm with energy consumption. We find that oligopolies consider different energy policies and determine whether to take CSR by innovation. In accordance with Michelon[27], “it is necessary to clarify the complex relationship between CSR and Company performance”. The CSR firm obtains higher profit compared to the common-product firm.
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Therefore, the society will gain a higher quantity of LEC products and a better environment.
The energy tax rate changes in the same direction with the social welfare, but opposite, with
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consumer surplus. If a firm lower its energy consumption by eco-R&D ,voluntarily take
CSR, the tax cost will be decreased and it will have a long-term competitiveness because of
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the recognition by consumer . Noticeably, consumer prefer environment-friendly products.
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Additionally, the marginal cost of R&D in low-energy techniques decreases, as the
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production increases, the marginal cost of the LEC products decreases, which means that
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corporations can turn this short-term financial pressure into a long-term investment. In absence of other variable settings, energy tax is only policy instruments being
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considered, the behavior of other market structures has not been included in this paper. As the topics for future research, the variables should be expanded, the parameter design is
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more realistic, the research on other market structures is carried out, and research is
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conducted for specific industries. An investigation on how far this analysis can be extended to oligopolistic markets, that include a competitive fringe, is suggested. Oligopolistic CSR
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markets without an entry, could also be considered.
Author Contributions: The main contributions of Angela C. Chao are the theoretical model and literature review for this article. Hong Lucheng collected the data and empirical research to confirm the hypothesis in Section 3. Moreover, both authors discussed the intuitive explanation of the model, read and approved this version.
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Acknowledgments: The authors would like to thank two anonymous referees for their valuable comments.
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Conflicts of Interest: The authors declare that we have no conflicts of interest.
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