We consider a duopolistic industry where the sales of each firm depend on pricing and their goodwill stock. Future projects and investments can be either conservative (e.g. advertising) or social responsible to attract consumers. In addition to R&D costs, social responsible investment increases the production costs as well but is more sustainable in the long run. We analyze the conditions and incentive for social responsible investment and the equilibrium outcome under these conditions. To determine the equlibrium outcome and the optimal investment stratgies, a linear quadratic differential game is used and the Markovian strategies are derived numerically. Depending on the relationship of additional production costs and sustainability of social responsible investment, two equilibria emerge. Both firms either choose advertising or both invest in social projects. The equilibrium with two social responsible rms is Pareto improving if the investments attracts new consumers and does not move consumers from one firm to another.
Group for Research in Decision Analysis