Can Collusion Promote Corporate Social Responsibility? Evidence from the Lab

Abstract

Market competition can erode socially responsible behavior, suggesting that allowing collusive agreements regarding corporate social responsibility (CSR) may promote public interest objectives such as fair trade and environmental standards. We study this idea in a vertical product differentiation model, extended with firms that partly internalize external effects, and laboratory experiments. Firms choose between offering a 'fair' and an 'unfair' product that imposes a negative externality on a third party. The treatment is to allow firms to coordinate on the type of good they sell, while remaining in price competition. We find that CSR collusion diminishes product variety and polarizes. More of the same product type, fair and unfair, is offered, without a significant impact on the fraction of fair goods traded. Instead, thirdparty preferences are the more important driver of socially responsible behavior. We highlight implications for competition policy, where cartels may be exempted on sustainability grounds.