Innovative Applications of O.R.
A location model for boycotting with an application to kosher certification

https://doi.org/10.1016/j.ejor.2018.09.001Get rights and content

Highlights

  • We develop a one-sided location model for firms’ ethical behavior with boycotting.

  • We analyze the equilibrium outcome to highlight when boycotts are most effective.

  • The model is applied to the issue of kosher certification of restaurants in Israel.

  • We analyze demographic and restaurant data from the eight largest cities in Israel.

  • The data is used to estimate cost of certification and customers’ purchasing power.

Abstract

We develop a one-sided location model to predict the ethical behavior of firms in a market with consumer boycotting. Consumers’ ethical level is distributed along a line segment and they purchase only at firms that conform to their ethical consciousness. Firms maximize profits by choosing their ethical level. To capture the boycotting phenomena we make two assumptions. First, that firms are driven by profits and not ethical considerations. Second, that if consumers deem a firm to be engaged in unethical activity, then they refuse to purchase from it even products that are not the result of this unethical behavior. We develop the profit-maximization necessary conditions for equilibrium and show that when consumers are uniformly distributed then the equilibrium – if it exists – is unique. We solve the model for the uniform distribution case and show that firms will distribute symmetrically – but not uniformly – around the center location. Additionally, we demonstrate how the effectiveness of boycotts diminishes as the number of firms increases. We apply the model to the issue of restaurant kosher certification in Israel. In our application, kosher-keeping customers are boycotting non-certified restaurants since they generally refuse to dine in these restaurants even menu items that are kosher. We derive the relationship between the percent of kosher-keeping consumers and the equilibrium number of certified restaurants. Using population and restaurant data from Israel’s eight largest cities we estimate the implied cost of certification and the relative purchasing power of kosher-keeping customers.

Introduction

Political, social and religious activism is an increasingly important component of the business environment. Activists demand corporations to change their business practices and do not hesitate to boycott businesses who refuse to yield to these demands. Prominent examples include the boycott of cosmetic companies (e.g., Colgate-Palmolive; Proctor and Gamble) for their use of animal testing on some of their products, the boycott of major oil corporations (e.g., Shell; Exxon-Mobile; BP) for various environmentally related issues, and electronic and apparel brands for substandard working conditions in their manufacturers’ production lines (e.g., Nike, Gap, Apple). Boycotts and threats thereof have captured these corporations’ attention who, in many cases, responded with change to their corporate culture and practices (Klein, Smith, John, 2004, Diermeier, Van Mieghem, 2008).

To investigate how firms react to boycott threats we propose a location model (e.g., Hotelling, 1929, Downs, 1957) in which consumers are continuously distributed between ethical indifference and absolute ethical commitment. This model makes two core assumptions. First, that firms choose to locate themselves on the ethical spectrum with the objective of maximizing their profit or market share. In other words, firms are ethically indifferent and their motivation is purely economic. The second assumption is that once a firm is deemed unethical by a group of customers, then they avoid even merchandise that is not the result of this unethical conduct. This avoidance is in fact a boycott since the customers refuse to purchase any of the firm’s other products even if they do meet the customers’ tastes. For example, an apparel store may choose to sell fur coats in addition to other types of clothing. Consumers who buy man-made clothes but object to the sales of fur will boycott the store and not buy even the man-made clothes that this store is offering.

For a market with N firms, we derive the Nash equilibrium locations of the firms by characterizing the profit-maximization necessary conditions that the equilibrium must satisfy. When customers are distributed uniformly from absolute indifference to extreme ethical commitment then the necessary conditions are a set of linear equations, and therefore, if there is a solution, then it is unique. We compare the equilibriums of the monopolistic and oligopolistic settings and show that although customers are distributed uniformly, the firms are not distributed uniformly. When the number of firms in the market increases, the total profits increases too, and approaches the “first best” scenario, that is, the case in which customers are able to purchase everything they desire. Therefore, as the number of firms grows, their range of ethical behavior increases and the market power of the boycotters diminishes.

To illustrate the use of the model we apply the model to the issue of restaurant kosher certification in Israel. Orthodox Judaism dictates that a Jew must eat only kosher food. To enable orthodox Jews to dine outdoors, the Rabbinical authorities in Israel manage a kosher certification system for restaurants. It is common practice for kosher-keeping customers to verify that the restaurant they are going to is kosher-certified, and absent certification, they will not dine at the restaurant even if part (or all) of its menu is actually kosher. Thus, in effect, kosher-keepers are boycotting non-certified restaurants. From the restauranteur’s point of view, while certification allows her1 to cater to the religious population, it comes at the cost of strict limitations on the menu that she can offer and the ingredients that she may use. Worse still, due to certain religious reasons, a certified restaurant must be closed during the Sabbath, the day in which most of the secular population go out to dine. We show how, depending on the cost of certification, the number of certified restaurants changes with the portion of the religious population. Furthermore, using data from the Israel Central Bureau of Statistics (CBS) about population and religiosity, and restaurant data from a large restaurant database we infer the implied cost of certification and the purchasing power of religious customers relative to their secular counterparts. Our application can be extended to similar examples such as the Halal requirement of the Muslim population or the multiple levels of abstinence from meat and its products.

Our paper presents a theoretical model with consumer boycotting and applies it to a contemporary political issue in Israel. Its contributions are threefold. First, within the field of operations and management research, the paper offers a novel location model with a one-sided distance function that represents the fact that consumers boycott the firms that do not meet their ethical level and are indifferent with respect to those firms who do. We derive necessary conditions for the equilibrium and show how, when customers are uniformly distributed along the unit segment [0,1], these conditions are a set of linear equations with a unique solution.

Second, the numerical analysis of the equilibrium solution enhances our understanding of the economics and effectiveness of boycotts. Presumably, the ultimate goal of the boycotters is not to only abstain from the unethical product but rather to prevent its production in the first place. We find that credible boycott threats are very powerful in achieving this goal particularly when there are few firms operating in the market. In contrast, when there are many firms operating in the market, then boycotts are ineffective as there will always be a firm who will employ questionable business practices since it is profitable for her to cater to the population segment that is indifferent to these practices.

Third, in the context of sociology and religion, the model application can improve our understanding of the religious-secular relationship in Israel. In particular, it can address questions such as the power of the religious communities to enforce kosher keeping and Sabbath observance. The interlacement of religion and state in Israel is unique among Western democracies and is negotiated in a society with both highly secular and highly religious communities. The model’s application can provide insight into how communities with different religious levels interact.

Section snippets

Literature review

The economic theory at the foundation of this paper is the location model of Hotelling (1929). In the basic model, firms and customers are located along a unit segment that can represent geographical or product differentiation. The firms are profit maximizers and they first choose their price and then their location on the line. Customers minimize their total costs, which comprise the item price and the travel cost to the firm. Hotelling’s main conclusion is that firms tend to cluster to a

The model

Consider a market that operates in a society in which consumers have varying levels of ethical consciousness and boycott any firm that does not meet their ethical standard. Ethical consciousness forms a Guttman (1950) scale, that is, if a person with a certain degree of ethical consciousness rejects certain behaviors, then any other person with a higher degree of ethical consciousness rejects these behaviors, too. In line with standard location models, we model ethical consciousness as a

Model application

We illustrate the usefulness of the theoretical model with a discrete application about the kosher certification of restaurants in Israel.

Conclusion

In this paper, we develop and apply a location model in which consumers boycott firms who do not operate ethically and firms are ethically indifferent profit maximizers. We derive necessary conditions for equilibrium, and use these to numerically derive the equilibrium solution when customers’ ethical consciousness is uniformly distributed.

Our model application assumes that there are only two possible states: kosher and non-kosher. More complex discrete applications may consider multi-leveled

References (35)

  • A.J. Yates

    Hotelling and the new york stock exchange

    Economics Letters

    (1997)
  • C.M. Albrecht et al.

    Exploring why consumers engage in boycotts: Toward a unified model

    Journal of Public Affairs

    (2013)
  • Baron, D. P. (2002). Private politics and private policy: a theory of boycotts. Working Paper, Stanford...
  • G. Ben Porat et al.

    Days of (un) rest: Political consumerism and the struggle over the sabbath

    Politics and Religion

    (2011)
  • C. d’Aspremont et al.

    On hotelling’s “stability in competition”

    Econometrica

    (1979)
  • P. Delacote

    Contributions of game theory to the analysis of consumer boycotts

  • H. Dilek et al.

    Retail location competition under carbon penalty

    European Journal of Operational Research

    (2018)
  • Cited by (6)

    • Firm response to ethically motivated boycotts

      2023, European Journal of Operational Research
      Citation Excerpt :

      Other models introduced spatial asymmetry in the sense that the distance function behaves differently when the customers are above or below (right or left) to the firm’s location (e.g., Nilssen & Sørgard, 2002; Weijde et al., 2014). Single-sided models take this asymmetry to its extreme (e.g., Giat, 2019; Xefteris, 2013; Yates, 1997) and assume an infinite distance for any point in the “wrong side” of the firm’s location. Giat (2019) uses a single-sided distance function to model boycotting.

    • Spatial competition and social welfare considering different feasible location regions

      2023, Journal of Economics/ Zeitschrift fur Nationalokonomie
    • Money’s importance from the religious perspective

      2021, Annals of Operations Research
    View full text