The following paper has been influential since its publication more than two and a half years ago, and seems destined to have a lengthy shelf life, which we hope to contribute to. It is not only interesting theoretically, but gets at practical questions we consider existential at the level of our enterprise. If consumers (in our case travelers) are willing to pay a fair premium for building and operating a business that is more sensitive to environmental and social responsibility, we can afford to engage in fair trade; if they are not really willing, uh oh…
We are more than happy to share our empirical evidence, but for now let’s take a look at some scientifically-derived evidence:
Consumer Demand for the Fair Trade Label: Evidence from a Field Experiment
Jens Hainmueller
Massachusetts Institute of Technology (MIT) – Department of Political Science
Michael J. Hiscox
Harvard University
Sandra Sequeira
London School of Economics
April 1, 2011
MIT Political Science Department Research Paper No. 2011-9B
Abstract:
A majority of surveyed consumers claim to prefer ethically certified products over non-certified alternatives, and to be willing to pay a price premium for such products. There is no clear evidence, however, that people actually seek out such ethically certified goods and pay a premium for them when shopping. We provide new evidence on consumer behavior from experiments conducted in a major U.S. grocery store chain.We find that the Fair Trade label has a substantial positive effect on sales. Sales of the two most popular bulk coffees sold in the stores rose by almost 10% when the coffees were labeled as Fair Trade. Demand for the higher priced coffee was inelastic: sales of the labeled coffee remained steady when its price was raised by 8%. Demand for the lower priced coffee was more elastic: a 9% increase in its price led to a 30% decline in sales, as buyers switched to low-priced unlabeled alternatives. Overall the findings suggest that there is substantial consumer support for Fair Trade, although a segment of price-sensitive shoppers will not pay a large premium for the Fair Trade label.
Today, on the New Yorker‘s website, a post provides a useful brief literature review that covers this topic in a less academic manner; Raxa Collective cannot help but notice the importance of the findings:
Starting Saturday, companies that sell meat in grocery stores will have to label where the animal was born, raised, and slaughtered. It used to be enough to know that you were buying a hamburger or a steak. Since 2009, meat companies have also had to provide some vague information about origins—for instance, that a product came from North America. Now, you’re about to discover the whole life story of the animal you’re about to eat—and often you’ll learn that it came from abroad.
It shouldn’t come as a surprise that meat is part of an increasingly complex global supply chain. The total number of U.S. cattle is the smallest it has been since the nineteen-fifties, partly because of high feed costs and drought. The number of ranchers has been declining, too. On average, they are in their late fifties; fewer young people are interested in the tough, often unprofitable line of work. But Americans are still eating plenty of meat, and it has to come from somewhere. Mexico’s abundant forage has given it a comparative advantage, and cheaper transportation—in Mexico, in Canada, and elsewhere—has made it more economical to ship cattle long distances.
The labelling rule, set by the U.S. Department of Agriculture, applies only to grocery stores (and not in restaurants and other food-service establishments). The rule also carves out exceptions for food that has been processed—including meat that has been cured and smoked. Still, it will make meat more similar to other products, whose labels increasingly indicate whether your coffee is Fair Trade, whether your shirt was sewn under good working conditions, and whether your tomato was grown within two hundred miles of your grocery store. All this attention to labelling raises a question: How much do people care about it?
Those in favor of country-of-origin labels often cite a 2003 study, published in theJournal of Food Distribution Research, in which seventy-three per cent of people surveyed said they would pay an eleven-per-cent premium for steak with country-of-origin labelling and a nineteen-per-cent premium for a steak labelled “U.S.A. Guaranteed.” And a 2012 study by Boston Consulting Group found that eighty per cent of Americans surveyed said they would pay up to sixty per cent more for products labelled “Made in the USA.” But while people may say that they prefer products labelled with some desirable attribute, a growing body of research calls into question whether people’s behaviors fall in line with their intentions.
There are a handful of studies on how people respond to country-of-origin labels, but many of the conclusions conflict with one another and are cherry-picked by groups that have an interest in supporting, or opposing, the labels. (A 2010 study conducted by researchers at the U.S.D.A. looked at whether consumers of shrimp—one of the first products to bear country-of-origin labels—would shift their buying behaviors to favor the newly labelled product. They found that consumers were essentially indifferent.)
Still, maybe some lessons can be gleaned from other kinds of labels. In 2006, for instance, a study found that more than seventy-five per cent of surveyed consumers said they would pay at least fifty cents more per pound for Fair Trade coffee.
But a group of researchers from Harvard University, the Massachusetts Institute of Technology, and the London School of Economics was suspicious of whether people would actually pay more if they were given the choice. “Most survey respondents are unlikely to say they do not care about ethical standards when asked by an interviewer as they incur no cost at all for doing so, and this is the more socially appropriate response,” they wrote.
So they decided to conduct randomized field experiments in places where people were actually shopping: specifically, in twenty-six locations of a major U.S. grocery-store chain in Connecticut, Massachusetts, Maine, and Rhode Island. First, at some stores, they affixed Fair Trade labels to the bins of two types of bulk coffee, the French roast and a blend. In other stores, they affixed a similar-looking label, but with generic information and no mention of Fair Trade. The price was unchanged on all the bins. Sales of the coffee with the Fair Trade label rose by ten per cent, on average.
Then the researchers looked into what would happen if they asked people to pay more for the Fair Trade coffee. They affixed a more prominent Fair Trade label to both types of coffee and increased their prices by a dollar per pound. That made the French roast about thirteen dollars per pound and the blend about twelve. The results were telling: sales of the French roast stayed about the same, while sales of the blend dropped by thirty per cent. Both coffees had the Fair Trade label, but it seemed that more price-conscious shoppers—people who would have chosen the cheaper coffee over the more expensive one in the first place—didn’t think the coffee’s Fair Trade status was worth a dollar more. Less price-conscious shoppers—the ones who would have gravitated toward the more expensive coffee in the first place—didn’t mind paying the premium.
The conclusion of the study, published in 2011: “More price-sensitive shoppers weren’t willing to pay significantly more for the Fair Trade-certified product,” one of the authors, Jens Hainmueller, a professor of political science at M.I.T., told me. This isn’t the only industry where this is true: as Elizabeth Cline wrote in August, a 2006 study came to a similar conclusion when researchers studied whether people were willing to pay more for socks made under “good working conditions.”…
Organikos 