Socially Responsible Pricing

Abstract

When a firm sets a price for its product and sells to a market of customers with heterogeneous private valuations, the price divides the total pie of the social welfare into the firm's profit and consumer surplus. We examine and compare three commonly used socially responsible pricing schemes that may divide the pie differently. Specifically, the socially responsible (S) scheme maximizes the convex combination of the firm's profit and social welfare, with the weight on the latter referred to as the corporate social responsibility (CSR) level, equivalent to maximizing the firm's profit plus the CSR level times consumer surplus. The Nash bargaining (B) scheme follows the notion of proportional fairness, with the weight on consumer surplus being the given CSR level. The Rawlsian fairness (R) scheme generalizes the max-min fairness notion and aims to generate consumer surplus to be a fraction of the social welfare at the CSR level. We show that for any scheme, the firm's sacrifice in its profit always leads to a greater increase in consumer surplus, which suggests that a little CSR can go a long way. For any given customer valuation distribution and CSR level, we show that scheme B leads to a lower price than schemes S and R, generating more consumer surplus and social welfare. Moreover, when the firm has to commit to a scheme before knowing the valuation distribution, for the same CSR level, scheme S is robustly preferred from the firm's profit perspective because it leads to higher worst-case and best-case profit bounds than schemes B and R that somewhat surprisingly share the same lower and upper profit bounds. Nevertheless, scheme B is robustly preferred from the consumer surplus and social welfare perspectives.