Ethical differentiation and market behavior: An experimental approach

• Authors: Julian Rode.
• BSE Working Paper: 112 | September 15
• Keywords: price competition , Fair trade , ethical premia , contextual effects
• JEL codes: A13, B41, D43, D46
• price competition
• Fair trade
• ethical premia
• contextual effects

Does ethical differentiation of products affect market behavior? We examined this issue in triopolistic experimental markets where producers set prices. One producer’s costs were higher than the others. In two treatments, the additional costs were attributed to compliance with ethical guidelines. In the third, no justification was provided. Many participants playing the role of consumers reduced their experimental gains by purchasing the ethically differentiated product at a higher price ñ whether or not they knew the amount of extra cost. Individual differences were important (students of business/economics paid smaller premia than others). Finally, we speculate about the observed “demand function” for ethics and emphasize the use of experimental methodology to complement empirical studies designed to assess the potential market for ethically differentiated products.