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A positive analysis of Fairtrade certification

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  • Podhorsky, Andrea

Abstract

The Fairtrade program transfers income to farmers by establishing a price floor and an alternate distribution channel that bypasses intermediaries between the raw commodity and world markets. I develop a model of the international commodity supply chain, with monopolistically competitive final goods producers and consumers who value the ethical quality of goods. A small number of oligopsonistic intermediaries purchase the raw commodity from farmers in a given country and then sell to final goods producers in the world market. I consider the effects of a Fairtrade program that is too small to have an effect on the world price of the commodity. I show that the Fairtrade program decreases the intermediaries' market power and consequently, even farmers that are not selected into the program receive a higher wage than in the absence of the program. I establish the Pareto optimal Fairtrade price and assess the overall efficiency of the program. The program is a more efficient way to transfer income to farmers than a direct transfer equal to the premium commanded by certified products if the Fairtrade price is not set too high above the efficient wage for farmers. If the number of intermediaries were large, however, then the direct transfer would be more efficient than the program for all binding Fairtrade prices.

Suggested Citation

  • Podhorsky, Andrea, 2015. "A positive analysis of Fairtrade certification," Journal of Development Economics, Elsevier, vol. 116(C), pages 169-185.
    • Handle: RePEc:eee:deveco:v:116:y:2015:i:c:p:169-185
    DOI: 10.1016/j.jdeveco.2015.03.008
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    3. Alonso Alfaro-Urena & Benjamin Faber & Cecile Gaubert & Isabela Manelici & Jose P. Vasquez, 2022. "Responsible Sourcing? Theory and Evidence from Costa Rica," CESifo Working Paper Series 10108, CESifo.
    4. Pio Baake & Helene Naegele, 2017. "Competition between For-Profit and Industry Labels: The Case of Social Labels in the Coffee Market," Discussion Papers of DIW Berlin 1686, DIW Berlin, German Institute for Economic Research.
    5. Fernández Jardón, Carlos Mª, 2018. "Motivaciones de compra en consumidores de productos de comercio justo/Motivations of Purchase in Consumers of Fair Trade Products," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 36, pages 579-602, Mayo.
    6. Lefoll, Erwin & Günther, Isabel & Veronesi, Marcella, 2022. "Low Demand for Fair Trade Chocolate: Lack of Efficiency, Attention, Knowledge or Trust?," VfS Annual Conference 2022 (Basel): Big Data in Economics 264065, Verein für Socialpolitik / German Economic Association.
    7. Dick Durevall, 2020. "Fairtrade and Market Efficiency: Fairtrade-Labeled Coffee in the Swedish Coffee Market," Economies, MDPI, vol. 8(2), pages 1-17, April.
    8. Durevall, Dick, 2017. "Who Benefits from Fairtrade? Evidence from the Swedish Coffee Market," Working Papers in Economics 708, University of Gothenburg, Department of Economics.

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