Are monopolies efficient setters of ethical standards?

Abstract

We propose a novel analytical framework to study the equilibrium determination of ethical standards when a boycott movement (BM) that represents ethically concerned consumers pressures producers to scale back the production of objectionable products, at the expense of other, ethically indifferent, consumer groups. Focusing on monopolies, we find that under a fixed price regime monopolies—depending on the price—are either over or under appeasing the BM. If monopolies are free to set the price and boycotters substitute ethical violations with price reductions, then monopolies’ distortionary effect is twofold: (i) they are less likely to appease the BM compared to the social planner, and (ii) whenever they choose to appease, they over appease relative to the social optimum. Our results provide theoretical foundations for why producers in industries with abnormal customer willingness to pay such as luxury brands, are less likely to appease. The results also suggest that managers can use pricing mechanisms to exploit ethical demands of their customers. Conversely, governments should consider the welfare loss to the remaining consumer base caused by this exploitation.