Fair Trade

Abstract

This paper analyses a setting in which a vertically integrated fair-trade firm competes against vertically disintegrated, profit-maximising oligopolists. Consumers of the fair-trade product derive a ‘warm glow’ that depends on the wage paid to fair-trade producers; the firm returns all surplus to its farmers. Trade integration will unambiguously increase the size of the fair-trade firm, but the relative size compared to oligopolists may shrink. Furthermore, we show that the ‘warm glow’ effect may support a marginal expansion of the volume of fair trade, but for rather perverse reasons.