Label performance and the willingness to pay for fair trade coffee

Abstract

In this paper we investigate how label information detailing the performance of the Fair Trade labeling program with respect to coffee affect consumers’ willingness to pay in the United States and in Germany. We provide respondents (University students in the U.S and Germany) information regarding hypothetical benefits of the Fair Trade Coffee program on its intended beneficiaries on the production side (the revenue gains to participating marginal farmers (scope of the program)), and using stated preference conjoint methods test how this performance criterion relates to the willingness to pay for Fair Trade Coffee. Our empirical results identify a “threshold'' property of performance-based labels. In effect, the willingness-to-pay for performance-based Fair Trade labeled coffee exhibits an inverted-U shape in the sense that the willingness to pay is positively related to the scope of the program, but only up to a critical level. Thereafter, the willingness to pay declines as the income gains to participating growers increases further. Interestingly, this inverted-U property is exhibited by both the U.S. and German respondents with different critical thresholds.