Category Archives: Fair trade

Ethical differentiation and market behavior

In the article Ethical differentiation and market behavior: An experimental approach (in press in the Journal of Economic Behavior & Organization), Rode, Hogarth and Le Menestrel studied the purchase of ethically differentiated good (e.g. fair trade goods) in a laboratory setting with university students as participants.

Their experiment included three treatments. In the first treatment, consumers knew the extra costs incurred to produce the “higher ethical quality good” while in the second no information on the extra costs incurred was available to consumers. The third treatment acted as a control, without ethical differentiation, but with some products costing more than others due to higher production cost.

While in the third treatment participants generally purchased the product at the lowest price, in the first and second treatment they paid the price premium for the ethical good. The premium was paid even when consumers did not know the extra costs incurred by ethical producers. In fact, somewhat surprisingly, consumers paid higher premia when extra production costs were unknown. The least willing to pay price premiums for ethical goods were participants who studied economics and business.

You can download the paper here .

Reference

Ethical differentiation and market behavior: An experimental approach, Journal of Economic Behavior & Organization, Article in Press, Corrected Proof , Available online 22 December 2006
by Julian Rode, Robin M. Hogarth and Marc Le Menestrel

Abstract

Does ethical differentiation of products affect market behavior? We examined this issue in triopolistic experimental markets where producers set prices. One producer’s costs were higher than the others. In two treatments, the additional costs were attributed to compliance with ethical guidelines. In the third, no justification was provided. Many consumers reduced their experimental gains by purchasing the ethically differentiated products at higher prices. Individual differences were important (business/economics students paid smaller premia). Finally, we speculate about the observed “demand function” for ethics and emphasize using experimental methodology to complement empirical studies in assessing markets for ethically differentiated products.