A Virtuous interaction between pressure groups, firms and institutions: a subsidiarity principle in a horizontal differentiation model

In this paper we analyse the relationship between producers' ethical responsibility and consumers' welfare in a duopoly with horizontal (ethical) differentiation. We show that the entry of an ethically concerned (socially and environmentally responsible) producer generates a Pareto improvement for all (both ethically and non ethically) concerned consumers in the North in a Hotelling game in which the incumbent and the ethical entrant compete over prices and ethical features of their products. We also show that the price reaction of the incumbent when his location is fixed has additional positive welfare effects and that - when we remove the fixed location hypothesis -incumbent's ethical imitation adds to this even though it is compensated by reduced price competition. We also analyse the relative efficiency of tax financed direct aid to the South vis a vis a policy of duty exemption for i) the socially and environmentally responsible producer, ii) both producers. We therefore show under different games how changes in costs of ethical distance, ethical location of the incumbent and amount of the duty affect the relative welfare-dominance of these three different policies.