Socially Responsible Newsvendor

36 Pages Posted: 2 Apr 2021 Last revised: 26 Apr 2024

See all articles by Chen Hu

Chen Hu

Xi'an Jiaotong-Liverpool University (XJTLU)

Ming Hu

University of Toronto - Rotman School of Management

Yongbo Xiao

School of Economics and Management, Tsinghua University

Date Written: March 16, 2021

Abstract

With the advocacy on corporate social responsibility (CSR), it is common for firms to integrate profit objectives with social responsibilities, such as with an aim to boost consumer welfare. We focus on a socially responsible firm that is concerned with its profit as well as consumer surplus and examine four different types of pro-social behavior by the firm: optimizing a weighted average of the expected profit and consumer surplus (referred to as the mixed-objective model), negotiating with pro-social executives or consumer activists (referred to as the Nash bargaining), charitable donations after profit maximization (referred to as the donation), and ensuring the portion of consumer surplus to be a given fraction of the social welfare (referred to as the fairness model). Our results show that under all behaviors, there is a more substantial boost to consumer surplus at the expense of a slight decrease in profit when consumer surplus consideration (referred to as the CSC level) is lower. Among those four behaviors, while maintaining the same profit level, a donation is not the most consumer-surplus-enhancing pro-social behavior among those four behaviors, when the overhead cost is sufficiently high or when a high enough profit level needs to be maintained. This finding challenges Milton Friedman's advocacy that socially responsible businesses should indirectly fulfill their societal duties by first focusing on profit maximization and then redistributing the generated profit for social causes (Friedman 1970). Our results imply and quantify the managerial insight that in balancing consumer surplus against profit loss, a little commitment to consumers can go a long way. We also shed light on when the firm should choose a decentralized pro-social behavior, such as donations, and when it should incorporate consumer surplus consideration into operational decisions for consumer surplus enhancement.

Keywords: Newsvendor model, corporate social responsibility, consumer surplus, charitable donation

Suggested Citation

Hu, Chen and Hu, Ming and Xiao, Yongbo, Socially Responsible Newsvendor (March 16, 2021). Available at SSRN: https://ssrn.com/abstract=3805366 or http://dx.doi.org/10.2139/ssrn.3805366

Chen Hu

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
, Lake Science and Education Innovation District
Suzhou, JiangSu province 215123
China

Ming Hu

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Yongbo Xiao (Contact Author)

School of Economics and Management, Tsinghua University ( email )

Beijing, 100084
China

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