Effects of Cause Marketing Laws on Firms and Charities

Published February 24, 2022
By Yu Wang

How does regulatory monitoring of cause marketing affect firm behavior and donations to charity?

  • International Journal of Research in Marketing ISSN: 0167-8116
  • How does regulatory monitoring of cause marketing affect firm
    behavior and donations to charity?
  • Authors Praveen K. Kopalle, Aradhna Krishna, Uday Rajan, Yu Wang
  • Article publication date: 3 February 2021
  • DOI to Review Research Article

Cause marketing (CM) typically involves for-profit firms donating part of their sales revenue to a charity, with the hope that this will increase their profit. We argue that it is important for a regulator to monitor firms’ CM activities, and to assess how differences in the enforcement of CM laws impact the CM practice by firms.

Our analytical model uses a Stackelberg leader-follower game that endogenizes the regulator’s decision to enforce CM. The firm then decides whether to truthfully declare or overstate the amount it contributes to charity (and if overstate: by how much). We find the following results in equilibrium under different conditions: (i) CM campaigns are a win-win-win situation – they increase profit for the firm while being truthful, generate larger donations for the charity, and generate a cause marketing surplus for the regulator, resulting in "doing well while doing good," (ii) the best response of the firm is to be strategic, even when the regulator is strict with monitoring, or (iii) the regulator itself decides not to monitor CM, even though it knows that this results in untruthful behavior by firms. When we endogenize the extent of an overstatement, we find that the firm tends to be strategic by overstating donation percentage, whether the regulator is strict or not. As the proportion of unsophisticated consumers increases, the donation proportion decreases in general, and the overstatement level increases when the regulator is lenient and decreases when the regulator is strict. In equilibrium, the regulator is strict if the market size is large, and lenient otherwise.

A survey with consumers supports key modeling assumptions regarding consumers’ lack of knowledge of CM laws.