Business and economic thought instituted at least since the Reagan revolution in the United States have promoted firms’ narrowly self-interested, profit-maximizing conduct even at the expense of consumers and workers. This paradigm leads to social distrust and insufficient cooperation. Steven C. Salop explains this distortion and proposes 10 guidelines by which firms can self-moderate their behavior to produce prosocial outcomes.
Prosocial business behavior can use further encouragement. Trust and cooperation are important productive inputs in a market economy. Social norms support a trusting economy by leading to long-term cooperative relationships. Economic growth and trust move together. It is only rational to trust if you expect your trading partner to be trustworthy. Even aside from the direct effects on the transacting parties, benevolent, altruistic and other prosocial behaviors also have broader spillover effects. For example, a famous and amusing natural experiment involved a customer at a Tim Hortons drive-through in Canada who paid for the person in the car behind him. That generosity was followed by the next 226 drivers. Economic experiments have generated analogous results in a variety of situations.
Prosocial behavior (orwhat some would call “socially responsible” behavior) supports well-functioning markets and a more cohesive and cooperative economy and society. The concept of prosocial behavior lacks a precise, agreed-upon definition. However, it is generally understood to be voluntary behavior that takes account of the beneficial effects obtained by others, even when there is some cost to the behavior. Prosocial behavior is neither narrowly self-interested nor malevolent (i.e., antisocial). It includes cooperation, kindness, altruism, positive reciprocation, trustworthiness, and other benevolent behavior directed towards furthering the public interest. Motivations for individual prosocial behavior include personal innate personality traits and supporting one’s self-image, adopted moral standards, standing in the community, as well as signaling to others, as explained by Roland Bénabou and Jean Tirole. There is some further complexity in the definition in that engaging in prosocial behavior also can further an individual’s self-interest broadly defined. Even when it sacrifices short-run profits, prosocial behavior may increase longer-run profits by increasing demand by consumers and cooperative behavior by workers.
Insufficient Prosocial Business Behavior That Harms Consumers and Workers
There have been numerous allegations of large, successful companies selling products that they knew were unsafe, such as cardiac defibrillators by Guidant and Medtronic, and CPAP machines by Phillips that now have been recalled. Other examples are the minimization of the risks of autonomous driving systems by Tesla and Wells Fargo’s alleged consumer fraud culture. Promotion of oxycontin by Purdue Pharma and the role of the Sackler family is another highly visible example.
Such antisocial or purely profit-driven, narrowly self-interested behavior that harms counterparties will tend to weaken prosocial norms and by doing so, will lead others also to do so, as discussed here and here. In the end, society will be less trusting, productive and cohesive. The United States’ distribution of income has become strikingly more skewed, particularly the difference between the salaries of top executives versus average workers. This involves a choice by CEOs and Boards, not an invisible hand. There also has been a decline in trust in the U.S. as inequality has worsened.
Excesses of financial capitalism are similarly suspect. Leveraged buyouts that violate longstanding but non-binding employment policies or lead to a higher incidence of bankruptcies that harm workers, suppliers and consumers while earning high profits for the organizers have been all too common in the private equity industry. A possible poster child is the debt-financed acquisition of Friendly’s ice cream chain by Sun Capital, which then sold the land under the stores and leased back the stores, pocketing the proceeds, and subsequently declaring bankruptcy a few years later. The bankruptcy offloaded workers’ pensions to taxpayers through the Pension Benefit Guaranty Corporation, which also shaved the workers’ benefits. Suppliers were left holding worthless trade credit. Sun Capital subsequently purchased the debt at pennies on the dollar and reacquired the company. When asked about this conduct, the Sun Capital CEO, Mark Leder, apparently saw no social failing in the conduct, simply responding, “we don’t make the rules.”
The fact that Wall Street bankers who earn millions of dollars have violated the antitrust laws in numerous markets (here and here) may not be so surprising. But it was perhaps shocking to discover that highly respected Silicon Valley CEOs like Eric Schmidt and Steven Jobs made per se illegal agreements not to compete for engineers.
While antitrust prohibits price fixing and certain other conduct, it does not provide incentives for treating counterparties in a prosocial way. Firms with market power achieved “on the merits” are given free rein to charge high prices and those high prices are even blessed as being an engine of innovation. This is the case even if the customers are lower income with higher costs of search or have become locked-in. Substantial cost-cutting by private equity nursing home owners that had led to substantial increases in patient mortality is certainly not prosocial, but it does not violate the antitrust laws. Whether merger law should prevent an acquirer from raising the price of life saving drugs by more than 1,000% remains controversial. Certain extremely deceptive conduct may violate fraud law or Federal Trade Commission prohibitions of unfair and deceptive acts and practices.However, FTC prohibitions and sanctions are limited.
It might be suggested that a reduction in prosocial business behavior has been caused by the decline in the U.S. economy during the 1970s and the resulting “Reagan revolution,” which applauded a more libertarian approach of the type recommended by the writings of Ayn Rand and Milton Friedman. There certainly is considerable distance between President John Kennedy’s challenge, “Ask not what your country can do for you—ask what you can do for your country,” and Gordon Gecko’s famous “greed is good” speech in the 1980s.
Whatever the cause, specifying the business behavior by firms with market power that constitutes desirable prosocial behavior may not be obvious. What is fair in one realm may be unfair in another. In this regard, it is necessary to distinguish between market behavior towards counterparties (customers, workers and other suppliers) and behavior towards competitors. The latter involves knottier issues. This is because the “fairest” behavior towards competitors is to collude with them. But this collusion comes by harming consumers and other counterparties, who are intended beneficiaries of our market economy, as well as by reducing efficiency. I also will not focus on the possibly different issues raised by businesses environmental protection policies.
The following principles and guidelines are focused on a simpler issue—business behavior directed towards consumers, workers, and other counterparties.
Principles and Guidelines of Prosocial Behavior Towards Counterparties
Though often overlooked, even Milton Friedman recognized that businesses should satisfy social norms while pursuing profits. As he stated, their “responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom” [italics added].”
Friedman recommended that stockholders can pursue social goals on their own with the dividends paid by profit-maximizing corporations. But as Oliver Hart and Luigi Zingales have carefully explained, while Friedman’s ideas might apply to charity, it fails to apply when the corporation’s social impact is inextricably linked to its production or pricing decisions. They show that the corporate goal should not be shareholder value maximization, but rather shareholder welfare maximization which would take into account shareholders’ social preferences. In this regard, Keith Ericson’s survey analysis shows that shareholders would vote for lower price markups to raise consumer surplus.
The following 10 guidelines for prosocial business behavior towards consumers, workers, and other counterparties are premised on two overarching prosocial principles. First, shameless greed is neither prosocial nor good for the economy. Counterparties should be treated as valued market partners, not sheep available to be fleeced. Second, laws and regulations are expressions of valuable social norms to be embraced and implemented, not treated as targets for profitable evasion.
- Do not be selfish. Self-interested behavior is better for society than malevolent antisocial behavior. But while businesses certainly should be concerned with their profits and welfare, society will be more productive and cohesive if business behavior is motivated by more than narrow financial self-interest.
- Do not be greedy, even if you have the superior bargaining position. Demanding an excessive share of the surplus can lead a fairness-motivated counterparty to reject your offer, thereby leading to a failure to achieve a mutually beneficial agreement. However, even if the counterparty agrees, such behavior can lead to dysfunctional social effects, including generally less cooperative and more oppositional social interactions. In this regard, 50% is a good starting point for a “fair” share, though the fair share also might depend on the contribution of each side; for example, the creator of an innovative new product may deserve a higher share.
- Do not exploit vulnerable lower-income counterparties. For example, price discrimination that favors poor consumers should be encouraged while price discrimination that favors richer, more sophisticated shoppers should be avoided. This can be seen as a corollary to the previous principle. But more generally, sacrificing some personal benefits to help weaker parties is prosocial.
- Do not exploit locked-in counterparties with unanticipated changes in behavior. This type of “opportunistic” behavior against people that depend on you can be very profitable. It might sometimes violate antitrust law, but only under some very limited circumstances. Either way, it is an antisocial exploitation of a superior market position. When such conduct is to be changed, businesses should disclose in advance and apply the new conduct only to future (non-captive) counterparties so they can plan accordingly.
- Do not violate long-standing understandings. A business often can legally engage in behavior that is inconsistent from understandings based on previous conduct or informal promises that amount to unenforceable “social contracts.” However, doing so is antisocial because it violates mutual expectations.
- Do not deceive counterparties with false or misleading claims, or failure to disclose material information. Deceptive claims, including omissions of material information can violate various statutes. However, misleading counterparties to make a profit is decidedly antisocial even if legally permissible. However, this does not require baring your soul. Nor would I expect a firm to disclose its reservation price in bargaining. While mutual disclosure would support the second guideline, requiring unilateral disclosure would make the firm too vulnerable to exploitation to a counterparty that does not honestly reveal its own reservation price.
- Do not exploit counterparty decision-making behavioral flaws. It can be very profitable to exploit such decision-making flaws. Some new legal initiatives currently being pursued by the FTC include negative option contract renewals where there is no notice or where cancellation is made difficult, introductory offers premised on consumers not paying attention to the fact that prices will rise in the future, and unanticipated additional charges tacked on at the end of purchase process. The category also can involve framing in ways that lead to distorted purchase decisions, for example, emotionally laden pitches that lead to unreasonable anxiety and unfavorable purchases.
- Do not employ coercive threats in negotiations. Negotiating tactics such as offers along the lines of “your money or your life” are clearly antisocial. However, less extreme threats that go beyond simply rejecting the contact, such as “if you do not give me 90% of the surplus, I will try to get others to stop dealing with you,” also are not prosocial.
- Take account of harm caused by your products inflicted on some counterparties, even if they are beneficial for others. For example, if a pain medication may be beneficial for many customers but addictive and deadly for others, the business should engage in efforts to minimize the risk and protect those that are harmed. A similar point applies to products that are purchased by some addicted consumers, such as alcohol or sports betting, as well as products such as weapons that are used in harmful ways by some purchasers who might be screened out in advance.
- Do not evade responsibility for non-prosocial behavior, but instead apologize and make amends, including compensating the victims. Violating these principles can be considered as breaching the social contract between the business and its counterparties. If a business finds that it has violated the principles, it should endeavor to take responsibility by admitting its failure, offering an honest apology, including repairing the damage by compensating the victims.
Encouraging Business to Follow These Principles and Guidelines
Some might argue that the best approach would be to rely on law and regulation to incentivize prosocial behavior and deter antisocial behavior. Some of these behaviors might violate fraud, antitrust or consumer protection laws. Additional conduct also might be made illegal. If a law enforcement approach is taken, sanctions must be substantial. Numerous studies have shown that levying only modest legal sanctions might lead to “crowding out” of prosocial motives, as well illustrated by Uri Gneezy and Aldo Rustichini’s Israeli daycare center experiment, where a modest fine for late pickups of children led to increased lateness not less. Ramped up sanctions can include personal liability on executives, punitive damages, criminalization and public shaming. All of these are being attempted in oxycontin litigation involving Purdue Phama and the Sackler family, as discussed here and here. However, accomplishing preference changes may be a very useful and less costly supplement or substitute for some more intrusive legal rules. Moreover, narrowly self-interested people might be unlikely to support more intrusive legal changes.
Others might argue that it would be more efficient for businesses to pursue narrow self-interest and society to rely instead on redistributive taxes and transfers to achieve the desired prosocial outcomes. However, this approach also faces the impediment that narrowly self-interested people might not support such prosocial policies. Thus, even if only as a transitional step, it would be better to adopt policies to expand prosocial preferences and behavior that also will lead to wider support for other prosocial public programs.
Because prosocial business behavior leads to increased trust, it can increase profits, particularly as counterparties begin to expect more from business. Following these guidelines and going beyond short-term profit considerations can have substantial benefits. That behavior will create beneficial contagion effects that will increase the size of the economic pie and marginalize businesses that skirt close to and over the legal lines.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
