Market Entry of a Socially Responsible Retailer

As consumers become more conscious about social issues, they gain an additional "social benefit" when purchasing from a socially responsible retailer (or brand). This trend has motivated more socially responsible retailers (or brands) to enter the market with a "pre-commitment" to donate a certain proportion of their (A) profits or (B) revenues for social causes. In this paper, we present a game-theoretic model where a socially responsible retailer enters the market with an incumbent for-profit retailer and heterogeneous consumers. We examine the socially responsible retailer's pricing strategy and entry conditions, the impact of the socially responsible retailer's entry on the incumbent retailer's profit, and the conditions under which the incumbent retailer should deter (or tolerate) the socially responsible retailer's entry. Our equilibrium analysis generates the following insights. First, even if the incumbent retailer can profitably deter the socially responsible retailer's entry, the incumbent retailer can be better off tolerating it under certain conditions. Second, somewhat interestingly, the incumbent retailer is more likely to deter the type (B) retailer's entry even though such entry is less detrimental to the incumbent retailer