Mutual Outsourcing in a Vertically Related Market With Strategic Environmental Corporate Social Responsibility

This study considers mutual outsourcing firms in a vertically related market and examines their strategic adoption of environmental corporate social responsibility (ECSR) activities. We demonstrate that ECSR adoption reduces mutual outsourcing firms' profits, resulting in a prisoner's dilemma situation, but enhances welfare regardless of competition modes. We also find that Cournot competition generates higher levels of ECSR and welfare than Bertrand competition, whereas Cournot competition (under low substitutability) or asymmetric competition (under high substitutability) emerges as an equilibrium in the endogenous choice of competition modes. Finally, we provide policy discussions on input pricing strategies, showing that a discriminatory wholesale price reduces welfare when products are less substitutable, whereas its effects on ECSR and profits depend on the competition mode; in contrast, a mutual outsourcing price regulation consistently decreases mutual outsourcing firms' ECSR and profits but may improve welfare when products are highly substitutable under Bertrand competition.