To assess the impact of CSR on profitability,
we present the following simple example. Assume there are two firms that produce identical goods, except one company adds a social characteristic to its product. Invoking the theory of the firm, we assume that each firm makes optimal choices, which means that each produces at a profit-maximizing level of output. It can be shown that, in equilibrium, both will be equally profitable. The firm that produces a CSR attribute will have higher costs but also higher revenues, whereas the firm that produces no CSR attributes will have lower costs but also
lower revenues. Any other result-for instance,
one firm earning a higher rate of return-would
cause the other firm to switch product strategies.
Note that our conclusion is based on the assumption that there are no entry barriers associated with providing the social characteristic.
To assess the impact of CSR on profitability,
we present the following simple example. Assume there are two firms that produce identical goods, except one company adds a social characteristic to its product. Invoking the theory of the firm, we assume that each firm makes optimal choices, which means that each produces at a profit-maximizing level of output. It can be shown that, in equilibrium, both will be equally profitable. The firm that produces a CSR attribute will have higher costs but also higher revenues, whereas the firm that produces no CSR attributes will have lower costs but also
lower revenues. Any other result-for instance,
one firm earning a higher rate of return-would
cause the other firm to switch product strategies.
Note that our conclusion is based on the assumption that there are no entry barriers associated with providing the social characteristic.
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