Pricing Cause-Related Marketing Products

Abstract

The broad takeaway from the literature on cause-related marketing products, where firms donate to charities when consumers make a purchase, is that "warm glow" can increase demand. However, recent field results show that embedding donations increases demand only if the price of the product is high enough. Otherwise, demand can diminish in the donation amount, implicating mechanisms beyond warm glow, specifically reputation for generosity. However, there is no extant work informing firms' cause-marketing choices given these non-monotonic demand effects. We seek to close this gap.

Drawing from identity theory models, we write a consumer model that incorporates reputation concerns in addition to warm glow. We solve analytically for optimal product prices and donation amounts under a differentiated duopoly as well as a monopoly setting. Our results are surprising. First, equilibrium profits can increase despite reputation concerns reducing consumers' utility. Second, warm glow and reputation concerns play complementary roles: warm glow drives the firm's choice to participate in cause marketing (i.e., embed a positive donation amount), while reputation concerns drive the profitability of the campaign. Third, firms may find it optimal to endogenously design cause marketing campaigns that induce negative reputation effects. Finally, surprisingly, it is in competition, not monopoly, that producers reap the most benefits from reputation concerns.

Keywords: cause marketing; corporate social responsibility, warm glow, reputation, social preferences, behavioral economics