Fair Trade Labeling: Inside or Outside Supermarkets?

This article is a theoretical contribution to the debate surrounding the introduction of Fair Trade products into large-scale retail distribution. In the model, a Fair Trade certifier and a traditional producer compete to supply their product to a single retailer, consumers who are Fair Trade likers are willing to pay an "ethical" premium for the Fair Trade product, and the premium depends on the revenue of Fair Trade product producers. The conditions of existence of an equilibrium where the Fair Trade product coexists with the traditional brand product on the retailer's shelves are highlighted. In particular, we show that a Fair Trade certifier implements this equilibrium if his preferences are such that the weight devoted to the price paid to producers is smaller than the weight he grants to the quantities of Fair Trade product sold. We also show that a retailer's decision to sell the Fair Trade product is not based on the percentage of consumers who are willing to pay for it, but on how much the Fair Trade likers are willing to pay.