When consumers are asked in surveys to choose between fair-trade goods and the run-of-the-mill variety, most will say they prefer fair trade. But are they really seeking out those products when they shop and are they actually willing to pay more for them? That was the question Jens Hainmueller, Stanford University political science associate professor, sought to answer.
Hainmueller, with Michael J. Hiscox of Harvard University and Sandra Sequeira of the London School of Economics, conducted a randomized control trial in 26 grocery stores to see whether Americans truly preferred and would spend more on fair-trade coffee.
Their research found consumers would, in fact, open their wallets wider for that sticker.
“There’s a lot of difference between cheap talk and real money,” Hainmueller says. “This research shows people are willing to pay for the label.”
If you ask consumers their preferences (as most marketing research does), many people will exaggerate their willingness to spend more for a good cause due to what researchers call social desirability bias. “The benefit of using a field experiment is that you get real shoppers, real purchases, and therefore real answers,” says Hainmueller.
The researchers conducted two experiments in 26 stores of a major U.S. chain in Connecticut, Massachusetts, Maine, and Rhode Island in 2008 and 2009. They put a fair-trade label on two kinds of coffee. To rule out a pure label effect, the researchers placed a label in the control stores that looked like the fair-trade label but included no ethical claim. “This is like the placebo drug, which looks like the real drug but does not have the key ingredient in it,” Hainmueller says.
They also designed and placed the label to make it challenging for consumers to see — someone would need to be fairly interested to locate it. The researchers found sales of the two most popular bulk coffees rose by almost 10% when the coffees carried a fair-trade label as compared with the placebo label. Then, researchers randomly raised the price of the two fair-trade test coffees by about 8% in half of the stores to see if sales would change.
For the first test coffee, sales continued to grow despite the price increase. For the second test coffee, a cheaper blend, sales declined by about 30% as customers reacted to the price increase by switching to the other cheap blends that were not fair-trade certified. This suggests that there are two types of consumers, one type that is indeed willing to pay a significant price premium for fair trade and another type that will not support a price premium.
“It is possible you would have gotten a different set of results if you tried this at a bargain hunting shop,” Hainmueller says. But the fact that the researchers saw the results in 2008-2009, when even high-income households were under financial pressure, suggests that consumers saw a concrete value in the fair-trade label.
The researchers were careful not to attribute any motivations to the consumers. “The simplest type of assumption is that consumers derive a warm glow from supporting a program that is helping poor coffee farmers,” they write. Yet there are other explanations: Consumers may buy it to keep up appearances or as a status symbol.
What It Means
The research is important, Hainmueller says, because it indicates the fast-growing fair-trade model might have real economic underpinnings.
Already, more companies have started adding fair-trade labels on their products. The average annual growth rate of U.S. sales of fair-trade-certified goods was close to 40% between 1999 and 2008. But it’s still a nascent industry. Total sales of fair-trade goods in the United States in 2011 amounted to about $1.4 billion — only about one-fortieth of the U.S. market for certified organic produce.
Some companies have been marketing goods as fair trade without making the riskier move of raising prices. But if people are willing to pay more for ethically produced goods — and the research is one indication that they will — then there’s a chance that companies that can charge more will actually pay suppliers more and thus produce real change in the developing world.
Obviously, there remain complicated questions — like whether the practices of the companies producing fair-trade products actually improve the lives of people in the developing world. There’s also debate about what “fair trade” really means. Often it suggests a product was made without the use of child labor, for example, or without potentially hazardous chemicals. But fair-trade labeling organizations operate in many different countries and have their own sets of standards.
Still, Hainmueller’s study could show companies that they can experiment more with raising prices on fair-trade goods. That might, in turn, mean more companies will adopt fair-trade practices and eventually more money will flow to poor farmers.
Jens Hainmueller is an associate professor of political economy (by courtesy) at Stanford Graduate School of Business and an associate professor in Stanford's Department of Political Science.