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Activists and Corporate Behavior in Food Processing and Retailing: A Sequential Bargaining Game Darren Hudson and Jayson Lusk This study examines the strategic interaction between food companies and activists using a game theoretic model of sequential bargaining in the absence of complete information. In a rather confined set of circumstances, findings indicate it is always in the best interest of the food company to comply with activists' demands. More frequently, however, there will be cases where compliance is not optimal, depending on the size of the expected effect of protest, cost of defending against protest, and the cost of protest to the activist. Key words: activists, corporate behavior, food industries, sequential bargaining game

Introduction You are the CEO of McDonalds. An activist group has given you an ultimatum that if you do not increase the size of your chicken pens in laying houses, they willprotest your company through demonstrations and television advertisements. A public campaign against you might be costly to market share and brand equity. You don't know whether the group is willing or able to sustain a campaign against you, or whether they are trying to bluffyou into doing what they want. What do you do?

Activism, as defined by critical writings, advertising, protesting, or boycotts, for example, has been an important part of American culture (Friedman, 1985). Activists represent the opinions of a t least some portion of the general population (Lohmann, 1991) and attempt to use their moral mandate to influence corporate or government behavior. Evidence suggests an increasing importance of activists through either direct action (Ayers, 2000) or through pressure on institutional investors (Gillan and Starks, 2000; Kang, 2000). The increasing pressure on corporate entities by activists (Kapstein, 2001) has led to at least some modification in corporate behavior ranging from simple corporate apologies for behavior (Belsie, 2000) to apparent preemptive moves to satisfy activists (Cook, 2000; Shepard, Betz, and O'Connell, 1997).Recent examples from the food industry provide some context for the problem. The People for Ethical Treatment of Animals (PETA) recently targeted McDonalds and Burger King for purchasing eggs from producers who, in their view, did not offer Darren Hudson is associate professor, Department ofAgricultura1Economics,MississippiState University, and Jayson Lusk is associate professor, Department of Agricultural Economics, Purdue University. The authors thank George H o f h a n for conversations relating to corporate responses to activists, seminar participants at Texas Tech University for useful suggestions, the Mississippi Agricultural and Forestry Experiment Station for funding, and two referees for assistance in model refinement. Any remaining errors belong to the authors. Review coordinated by DeeVon Bailey.

80 April2004

Journal of Agricultural and Resource Economics

sufficiently large pens for proper animal movement (along with issues regarding handling practices). Both McDonalds and Burger King acquiesced to PETA's demands without much effort on the part of PETA to stage demonstrations, despite the considerations that (a)this action would increase the restaurant chains' cost structure for eggs (Smith, 2001), and ( b )increased cost likely could not be passed along to consumers without loss of market share. Publicly released financial records reveal that McDonalds had about $40 billion in sales in 2001. At the same time, PETA's 2001 budget was $13 million. How does a $13 million entity force a $40 billion entity to change behavior? This problem goes beyond the McDonalds versus PETA example. All manner of activist groups with different agendas engage food companies every year. For example, Greenpeace protested NovartisIGerber's apparent use of genetically modified soy products in baby foods after a promise to discontinue the practice (Greenpeace, 2001). As both Hoffman (2002) and Hammonds (2002) have pointed out, this engagement between activists and food companies is one of the most pervasive issues in the food industry today. However, little research has been conducted into the causes and consequences of activist demands on food companies. The growing level of engagement of food companies may be socially suboptimal inasmuch as activists likely represent the interests of only subsets of the population (Lusk, 2003) but yield disproportionate power to affect outcomes. The objective of this study is to examine the strategic interaction between activists and food companies in general. A sequential bargaining game is utilized to describe the relationship between threats of protest, compliance offers, and decisions to protest in a framework of incomplete information. That is, the food company is not a priori aware of the seriousness or the ability of an activist to protest once the threat of protest has been made (alternatively, there is no meaningful information in the signal given by a threat of protest). This model provides insight into the optimal decisions when an activist sho