Evolutionary competition in a mixed market with socially concerned firms

Abstract

In this paper we study an oligopoly market where profit-maximizing firms and socially concerned firms compete in quantities. Confronting remarks by Milton Friedman and Gary Becker, we are using an evolutionary setting to investigate the endogenous choice of the proper objective of business firms and the influence of product differentiation on the long run survival of firms which pursue non-profit motives. We find that firms which consider a combination of profit and consumer welfare can indeed have larger market shares and profits than their profit-maximizing rivals. One insight is that it might pay off for shareholders to consider stakeholder welfare, but that the level of social concern should not be too high. Based on a strategy׳s profitability, we consider asynchronous evolutionary updating with firms selecting Nash quantities or choosing best replies to the expected market quantity. Here we observe that the consumers׳ willingness to pay a price premium for products is crucial for the long run survival of socially concerned firms. Depending on the degrees of product differentiation and social concern, long run outcomes consist either of both types of firms or only one type of firm. If the firms׳ propensity to switch between a social or a profit-maximizing strategy is sufficiently large, steady states are unstable and even complicated dynamics can occur.