Sustainability labels do matter

I've been reading a few papers on aspects of Fair Trade recently (I'll blog some of them over the coming days). Like many economists, I'm not sold on the positive effects of fair trade - but more on that later. In this post, I want to focus on this recent paper by Ellen Van Loo (Ghent University), Vincenzina Caputo (Korea University), Rodolfo Nayga Jr. and Han-Seok Seo (both University of Arkansas), and Wim Berbeke (Norwegian Institute for Bioeconomy Research), published in the journal Ecological Economics (sorry I don't see an ungated version anywhere).

In the paper, the authors do a couple of interesting things. First and foremost, they use discrete choice modelling (a type of non-market valuation technique, where you repeatedly present people with different hypothetical options, and they choose the option they prefer - a technique I've used for example in this paper (ungated earlier version here), and in a forthcoming paper in the journal AIDS and Behavior that I'll blog about later), to investigate people's willingness-to-pay (WTP) for different sustainability labels on coffee. The different labels they look at are USDA Organic certified, Fair Trade certified, country-of-origin labelling, and Rainforest Alliance certified. If people truly value these difference labels (presumably because of the certification), then they should be willing to pay more for products that have them.

Second, the authors use eye-tracking technology to follow which characteristics of the products people pay the most attention to when making these hypothetical choices. Eye-tracking involves following the movement of the eyes so that you can identify where the subject is looking, and for how long they are concentrating on elements they are looking at. I'd say it's quite an exciting thing to do in the context of discrete choice modelling, since there is always the change that people don't pay attention to all of the attributes of the hypothetical products (or scenarios) they are presented with.

Anyway, the authors found a number of things of interest, starting with:

When evaluating the coffee attributes, participants attached the highest importance to the flavor followed by the price, type of roast and in-store promotions... the sustainability labels are perceived as less important compared to other coffee attributes, with USDA Organic and Fair Trade being more important than Rainforest Alliance.

They also discovered there were three distinct types of consumers:

1. "Indifferent" - consumers who didn't pay attention to either price or sustainability labelling (9.9% of the sample);
2. "Sustainability and price conscious" - consumers who attached a high importance to both sustainability labelling and price (58.0% of the sample); and
3. "Price conscious" - consumers who attached a high importance to price but not sustainability labelling (32.1% of the sample).

The eye-tracking results confirmed that the consumers who said they attached higher importance to sustainability labelling (or price) did indeed pay more attention to those attributes when selecting their choice in the discrete choice exercises. But did they want to pay more for them? The authors find that:

USDA Organic is the highest value attribute [among the sustainability labels]... followed by Rainforest Alliance and Fair Trade...

USDA Organic had the highest WTP among all the sustainability labels examined, resulting in a WTP premium of $1.16 for a package of 12 oz. This is followed by the Rainforest Alliance label and the Fair Trade label ($0.84 and $0.68, respectively).

So, people are willing to pay more for sustainable coffee. How does that compare with what they actually pay though? The authors note:

The actual price premium for coffee with a sustainability label ranges from $1.5 to $2.3/12 oz. when comparing coffee products with and without the label from the same brand.

Which suggests that the retailers are over-charging for these sustainable coffee products, relative to what the average consumer is willing to pay. However, the results overall do suggest that sustainability labels do matter. It doesn't tell us whether that is a good thing overall though - a point I'll no doubt come back to later.