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Fairtrade Labelling in a Bertrand Competition Model with Monopsony Power

  • Andreas Graichen

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.

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Length: 37 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:bav:wpaper:050_graichen
Contact details of provider: Web page: http://www.bgpe.de/

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  1. Fabrizio Adriani & Leonardo Becchetti, 2004. "Fair Trade: A 'Third Generation' Welfare Mechanism to Make Globalisation Sustainable," CEIS Research Paper 62, Tor Vergata University, CEIS.
  2. LeClair, Mark S., 2002. "Fighting the Tide: Alternative Trade Organizations in the Era of Global Free Trade," World Development, Elsevier, vol. 30(6), pages 949-958, June.
  3. Julian Rode & Robin Hogarth & Marc Le Menestrel, 2004. "Ethical differentiation and market behavior: An experimental approach," Economics Working Papers 779, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2006.
  4. Mark Hayes, 2006. "On the efficiency of fair trade," Review of Social Economy, Taylor & Francis Journals, vol. 64(4), pages 447-468.
  5. Loureiro, Maria L. & Lotade, Justus, 2005. "Do fair trade and eco-labels in coffee wake up the consumer conscience?," Ecological Economics, Elsevier, vol. 53(1), pages 129-138, April.
  6. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  7. Chris Arnot & Peter C. Boxall & Sean B. Cash, 2006. "Do Ethical Consumers Care About Price? A Revealed Preference Analysis of Fair Trade Coffee Purchases," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(4), pages 555-565, December.
  8. Kurjanska, Malgorzata & Risse, Mathias, 2006. "Fairness, Export Subsidies, and the Fair Trade Movement," Working Paper Series rwp06-023, Harvard University, John F. Kennedy School of Government.
  9. Andreoni, James, 1990. "Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving?," Economic Journal, Royal Economic Society, vol. 100(401), pages 464-77, June.
  10. Bacon, Christopher, 2005. "Confronting the Coffee Crisis: Can Fair Trade, Organic, and Specialty Coffees Reduce Small-Scale Farmer Vulnerability in Northern Nicaragua?," World Development, Elsevier, vol. 33(3), pages 497-511, March.
  11. Green, Richard J, 1996. "Increasing Competition in the British Electricity Spot Market," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 205-16, June.
  12. Marette, Stephan & Crespi, John M & Schiavina, Allesandra, 1999. "The Role of Common Labelling in a Context of Asymmetric Information," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 26(2), pages 167-78, June.
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