Can a company be ethical? Milton Friedman strongly claimed that the social responsibility of a company is to increase its profits. In a recent Science article, Gneezy et al. objected this view based on shared social responsibility. Based on an experiment, they showed that companies can connect increased profits with social responsibility. How does this work?
In an amusement park, pictures were taken from participants riding a roller coaster-like thing. As they stepped out of it, they could buy the picture. There were four different scenarios:
In an amusement park, pictures were taken from participants riding a roller coaster-like thing. As they stepped out of it, they could buy the picture. There were four different scenarios:
- picture for 12.95 $
- picture for 12.95$ while half of the price is donated to a charity
- picture for pay-what-you-want (incl. 0$)
- picture for pay-what-you-want while half of the payment is donated to a charity
For a price of 12.95$, slightly more pictures were sold if half of the price was donated to a charity. However, pay-what-you-want was much more attractive with 10x more purchases. The average price for pay-what-you-want without charity was about 1$ while with charity about 5$. Hence, the company could have made 600,000 $ more annual profit by changing from the 12.95$ without charity to pay-what-you-want with charity option (since the cost for a picture is about 1$). This drives the main conclusion that companies' ethics do not necessarily compete with companies' economics - contrary to Friedman's claim.
Is this convincing? If the price for the customer increases, the costs of the customer increase but the costs of the company stay constant. At the same time, the company's profits increase while the additional benefit for the customer (from the picture) doesn't change. Finally, the social contribution of the company is constant while the customer's social contribution grows. Therefore, the company doesn't directly participate in social contribution but rather creates additional consumption while concealing the net benefits. As humans are evolutionary adapted to social and moral behavior, it is not surprising that humans do contribute although the direct benefits don't exceed the direct costs. These points were raised by a response to the article.
The authors replied and mainly agreed with the analysis. However, they point out that the company does contribute by taking the risk of earning less per picture than its costs (as zero were included in the pay-what-you-want option). This justifies their claim that the company indeed contributes to social welfare. They conclude that shared social responsibility is a tool which enables companies to increase profits while contributing to society.
I'm not very convinced by the authors' reply since they didn't show that the risk-taking of the company is necessary. It might be the case that profit could be similarly increased if 0$ is not included in the pay-what-you-want range. Furthermore, it's difficult to argue that the customers' behavior is rational. One might even relate this to asymmetric information as the customers probably don't know that the company gains from the net benefits. Finally, the costs of risk taking seems to be slightly over-rated and based on a good selling strategy with spread and pooled risks the risk would diminish.
Is this convincing? If the price for the customer increases, the costs of the customer increase but the costs of the company stay constant. At the same time, the company's profits increase while the additional benefit for the customer (from the picture) doesn't change. Finally, the social contribution of the company is constant while the customer's social contribution grows. Therefore, the company doesn't directly participate in social contribution but rather creates additional consumption while concealing the net benefits. As humans are evolutionary adapted to social and moral behavior, it is not surprising that humans do contribute although the direct benefits don't exceed the direct costs. These points were raised by a response to the article.
The authors replied and mainly agreed with the analysis. However, they point out that the company does contribute by taking the risk of earning less per picture than its costs (as zero were included in the pay-what-you-want option). This justifies their claim that the company indeed contributes to social welfare. They conclude that shared social responsibility is a tool which enables companies to increase profits while contributing to society.
I'm not very convinced by the authors' reply since they didn't show that the risk-taking of the company is necessary. It might be the case that profit could be similarly increased if 0$ is not included in the pay-what-you-want range. Furthermore, it's difficult to argue that the customers' behavior is rational. One might even relate this to asymmetric information as the customers probably don't know that the company gains from the net benefits. Finally, the costs of risk taking seems to be slightly over-rated and based on a good selling strategy with spread and pooled risks the risk would diminish.
