Fair Trade Draws Buyers, Study Says

Student-professor team shows label compensates consumers for higher prices

Professor of Government Michael J. Hiscox has found that the market may not be as cold-hearted as economic theory would suggest. In a study conducted between June and November 2005, Hiscox discovered that consumers were willing to pay more for products that were labelled “fair trade.”

Hiscox and Nicholas F. B. Smyth ’05, who wrote his thesis on their research, carried out the social labeling experiment at ABC Carpet and Home, an upscale Manhattan housewares store.

They compared the sales of towels and candles, to which a “fair trade” label had been applied, to similar products that did not carry the label.

The label included a statement that certified that the product was made in a “safe and healthy working environment which is free of discrimination.”

Hiscox and Smyth found that sales increased dramatically for the labeled products. Even more surprisingly, consumers kept buying the products even as prices went up.

“It did surprise me that demand for the labeled products was so strong and price inelastic,” Hiscox wrote in an e-mail. “It was not just that people bought more of the goods once they were labeled, but they bought even more when we raised prices by 10 percent and still more when we raised prices by 20 percent.”

Richard B. Freeman, Ascherman professor of economics, said that the study was the most conclusive social labeling experiment done to date. Freeman has also done research on social labeling and its potential to inform consumers’ decisions.

“Other social labeling experiments have yielded weak results, and this study builds on them to do the closest to a real lab type experiment we have, and the results are strong,” Freeman wrote in an e-mail.

But ABC Carpet and Home caters to a specific well-to-do demographic, said one professor.

“One issue is that it’s saying that rich yuppies care about social labeling (if you have ever been to ABC, then you will understand),” wrote Raymond J. Fisman, a visiting professor from the Columbia School of Business, in an e-mail.

Hiscox said he is planning to undertake a major social labelling experiment with a supermarket chain in Italy, which caters to a broad swath of Italian society.

While the study’s conclusion appears to contradict established thinking about consumer preferences and price, Eileen Kohl-Kaufman, executive director at Social Accountability International, which is undertaking the Italy study with Hiscox, said that the experiment’s conclusions were consistent with economic theories about consumer preferences.

“The idea is to make consumers aware of what they are buying and to reward good practices,” Kohl-Kaufman said. “For example, my sixteen-year-old daughter won’t buy anything that was made by someone younger than her, but in many cases there is no way to know that.”

Smyth, who was a Crimson editorial editor, said that the experiment confirmed his belief that consumers will support good labor standards.

“I have believed for a while that there was a market for good working conditions out there, and this was just a case of consumers not having enough information. We supplied the information, and they responded,” Smyth wrote in an e-mail.

Hiscox and Smyth asked many retail stores in Harvard Square and Boston to participate in the social labeling experiment.

Many feared calling attention to labor issues in their stores and declined, according to the study.

—Staff writer Adrian J. Smith can be reached at smith9@fas.harvard.edu.