Efficient Consumer Altruism and Fair Trade Products

Efficient Consumer Altruism and Fair Trade Products

Yearly sales of “fair trade” products exceeds $2.3 billion worldwide. Consumers who are altruistic and rational will choose these product-donation bundles when the bundle is cheaper than its elements. Assume a supplier’s investment reduces retailers’ costs (or improves quality), but this investment is non-verifiable, hence sub-optimal even with infinitely-repeated interaction. A retailer paying the supplier more can induce greater investment while benefiting from consumers’ altruism towards the supplier. Thus, the bundle is produced at a lower cost (and under perfect competition will be cheaper) than its elements. We provide evidence for this model in the context of the coffee industry.