This model examines the impact of a fairtrade labelling scheme on global and country-specific welfare in a two-stage north-south trade framework. In the first stage (the producer market) two northern processors buy a commodity from a group of small–scale agricultural producers in the south producing the commodity under perfect competitive market conditions. One of the processors buys a conventional produced commodity and uses its monopsony power to cut the commodity’s price. The second processor is a fairtrade processor, i.e. meets the necessary requirements for being awarded a fairtrade label like paying a minimum price for the commodity to the producers and a license fee to the labelling organization. In the second stage (the consumer market) both firms are processing the commodity and selling their products to the northern consumers. The price is determined by Bertrand compe- tition. Consuming a labelled product is assumed to generate additional utility on behalf of a warm glow effect. I show how changes of certain parameters crucial to the fairtrade system influence welfare in both the northern and the southern country.
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Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number
050.