The Handmade Effect: A Model of Conscious Shopping in an Industrialised Economy

Although online marketplaces for handmade products persist, little theoretical research has been undertaken to explain why firms choose a handmade strategy. In this paper, I develop a model that can explain the persistence through a handmade effect on the consumer side. I show that when consumers are willing to pay a sufficiently high handmade premium, the firm chooses production by hand over superior machine production. When the firm is part of a duopoly, the existence of consumers who care about the conditions under which a product is manufactured can explain the firms’ specialisation and, thus, the observed co-existence of handmade and machine-made products in the economy. Such specialisation is efficient, and can be robust to collusion. The presence of shoppers who are uncertain about the appropriate behaviour may enable the monopolist to use a handmade strategy to signal a social norm of conscious consumption.