Fair trade

This paper deals with the behavior of fair trade organizations in an oligopolistic setting in which the vertically integrated fair trade firm produces a commodity which is a weak substitute for another commodity. Profit-maximizing oligopolists are vertically disintegrated and produce for both markets and the fair trade firm can charge a premium to consumers due to a “warm glow effect” that depends on the wage paid to fair trade producers. We show that trade integration will unambiguously increase the size of the fair trade firm. However, the relative size compared to oligopolists shrinks with integration. The effect of a change in substitutability between the two commodities on markets shares depends on the relative market potential. Furthermore, we show that the warm glow effect does not support an expansion of the volume of fair trade. JEL-Classification: F12.UnpublishedAkiyama, T. and P.N. Varangis, 1990. The impact of the international coffee agreement on producing countries. World Bank Economic Review 4(2) 157-173. Becchetti, Leonardo and Fabrizio Adriani, 2002. Fair Trade: a “third generation welfare” mechanism to make globalisation sustainable. Working Paper, University of Rome Tor Vergata, Department of Economics. Available at http://dspace.uniroma2.it/dspace/bitstream/ 2108/274/1/170.pdf. Accessed 26/3/2007. Booth, P. and L. Whetstone, 2007. Half a cheer for fair trade. 26th IEA Current Controversies Paper, Institute of Economic Affairs: London. Conrad, K., 2005. Price Competition and Product Differentiation When Consumers Care for the Environment, Environmental and Resource Economics 31, 1-19. The Economist, 2006. Voting with your trolley. December 7 2006. The Economist, 2007. Excellence in a cup. January 25 2007. Eriksson, C., 2004. Can green consumerism replace environmental regulation? - a differentiated-products example, Resource and Energy Economics 26, 281-193. Feenstra, R., 2004. Advanced International Trade, Princeton University Press. Graeker, M., 2006. Eco-labels, Trade and Protectionism, Environmental and Resource Economics 33, 1-37. Gresser, C. and S. Tickell, 2002. Mugged: poverty in your cup. Oxfam International. Available at http://www.oxfam.org.uk/what we do/issues/trade/mugged coffee.htm. Accessed 12/2006. Harford, T., 2006. The Undercover Economist. Little, Brown: London: 2006. Hayes, M., 2006. On the efficiency of Fair Trade. Review of Social Economy 64#4, 447-468. Hiscox, M.J. and N.F.B. Smyth, 2007. Is There Consumer Demand for Improved Labor Standards? Evidence from Field Experiments in Social Labeling, Department of Government, Harvard University, mimeo. Howley, K., 2006. Absolution in your cup: the real meaning of Fair Trade coffee. Reason March 2006. Available at http://www.reason.com/news/show/33257.html. Accessed 12/2006. Krier, J-M., 2005. Fair Trade in Europe 2005. Fair Trade Advocacy Office: Brussels: 2005. Available at http://www.fairtrade.net/fileadmin/user upload/content/FairTradeinEurope2005.pdf. Accessed 12/2006. Krivanos, E., 2004. The impact of coffee market reforms on producer prices and price transmission.World Bank Policy Research Working Paper No. 3358, July 2004. World Bank: Washington DC. Leclair, M., 2002. Fighting the tide: alternative trade organizations in the era of global free trade.World Development 30#6, 949-958. Lindsey, B., 2003. Grounds for complaint? ‘Fair Trade’ and the coffee crisis.Trade Briefing Paper No. 16. Cato Institute Center for Trade Policy Studies: Washington DC. Available at http://www.freetrade.org/node/68. Accessed 27/3/2007. M¨alk¨onen, V., 2005. Harmonization Versus Mutual Recognition of National Eco-labels, Helsinki Center of Economic Research Discussion Paper No. 45. Maseland, R. and A. de Vaal, 2002. How fair is Fair Trade? De Economist 150#3, 251-272. Milford, A., 2004. Coffee, co-operatives and competition: the impact of Fair Trade. CMI Report R 2004: 6. Chr. Michelson Institute: Bergen, Norway. Available at http://www.cmi.no/pdf/?file=/publications/2004/rep/r2004-6.pdf. Accessed 26/3/2007. Nicholls, A. and C. Opal, 2004, Fair Trade: Market-driven Ethical Consumption. SAGE Publications Ltd.: London. Ponte, S., 2002. The ’latte revolution’? Regulation, markets and consumption in the global coffee chain. World Development 30(7) 1099-1122. Rice, R., 2001. Noble goals and challenging terrain: organic and fair trade coffee movements in the global marketplace. Journal of Agricultural and Environmental Ethics 14 39-66. Ronchi, L., 2006. “Fairtrade” and market failures in agricultural commodity markets. World Bank Policy Research Working Paper No. 4011, September 2006. World Bank: Washington DC. Sutton, J., 1991. Sunk Costs and Market Structure. MIT Press: Cambridge, MA. Wilkinson, J., 2006. Fair trade moves central stage. Working Paper No. 3. The Edelstein center for social research. Rio de Janeiro, Brazil. Available at http://www.edelsteincenter.org.br/wp3 english.pdf. Accessed 15/5/07