Market competition and ethical standards: the case of fair trade mainstreaming

Figures & data

Figure 1. The different phases of the process of mainstreaming FT. Based on: Davies (2007), Doherty et al. (2013), Nicholls and Opal (2005), and Raynolds (2009).

Table 1. Characterization and results of mainstreaming fairtrade.

	Symmetric $t$ ($t_{ct}=t_{ft}=t)$	Asymmetric $t$ $\left(t_{ct}\ne t_{ft}\right)$
Charity Phase (1950 – end 1960s)
A segmented market exists, separated by a border of (un)awareness and (dis)interest in FT. One market segment is served by a conventional firm, and a charity-driven segment is served by an FT firm. Specific model features: two separated market segments with two firms acting as monopolies located at the opposite extremes of the fairness continuum.
Market shares (exogenous)	$\begin{array}{l}\left(ct\right):x^{\ast }\\ \left(ft\right):1-x^{\ast }\end{array}$	$\begin{array}{l}\left(ct\right):x^{\ast }\\ \left(ft\right):1-x^{\ast }\end{array}$
Prices	$\begin{array}{l}{p}_{ct}^{\ast }=V\\ p_{ft}^{\ast }=V-\left(1-x^{\ast }\right)t\end{array}$	$\begin{array}{l}{p}_{ct}^{\ast }=V\\ p_{ft}^{\ast }=V-\left(1-x^{\ast }\right)t_{ft}\end{array}$
Profits	${\pi }_{ct}^{\ast }=\left(V-c\right)x^{\ast }-F$	$\begin{array}{l}{\pi }_{ct}^{\ast }=\left(V-c\right)x^{\ast }-F\\ {\pi }_{ft}^{\ast }=\left(V-\left(1-x^{\ast }\right)t_{ft}-c\right)\end{array}$
		$\left(1-x^{\ast }\right)-F$
Wealth transfers	$S^{char}={\pi }_{ft}^{\ast }=(V-(1-x^{\ast })$	$S^{char}={\pi }_{ft}^{\ast }=(V-(1-x^{\ast })$
	$t-c\left)\right(1-x^{\ast })-F$	$t_{ft}-c\left)\right(1-x^{\ast })-F$
Alternative Phase (end 1960s – 1988):
The border of unawareness disappears and the market becomes one, as World shops appear in high streets. The FT firm is still ideologically driven as it aims at establishing an alternative trade system. Specific model features: two duopolists with the location of both firms fixed in their original positions.
Market shares	$x^{\ast }=1-x^{\ast }=1/2$	$\begin{array}{l}{x}^{\ast }=\frac{1}{3}{\displaystyle \frac{\left(t_{ct}+2t_{ft}\right)}{\left(t_{ct}+t_{ft}\right)}}\\ 1-x^{\ast }={\displaystyle \frac{1}{3}}{\displaystyle \frac{\left(2t_{ct}+t_{ft}\right)}{\left(t_{ct}+t_{ft}\right)}}\end{array}$
Prices	$p_{ct}^{\ast }=p_{ft}^{\ast }=t+c$	$\begin{array}{l}{p}_{ct}^{\ast }={\displaystyle \frac{1}{3}}(t_{ct}+2t_{ft})+c\\ p_{ft}^{\ast }={\displaystyle \frac{1}{3}}(2t_{ct}+t_{ft})+c\end{array}$
Profits	${\pi }_{ct}^{\ast }={\pi }_{ft}^{\ast }={\displaystyle \frac{t}{2}}-F$	$\begin{array}{l}{\pi }_{ct}^{\ast }={\displaystyle \frac{1}{9}}{\displaystyle \frac{{\left(t_{ct}+2t_{ft}\right)}^2}{\left(t_{ct}+t_{ft}\right)}}-F\\ {\pi }_{ft}^{\ast }={\displaystyle \frac{1}{9}}{\displaystyle \frac{{\left(2t_{ct}+t_{ft}\right)}^2}{\left(t_{ct}+t_{ft}\right)}}-F\end{array}$
Wealth transfers	$S^{alter}={\pi }_{ft}^{\ast }={\displaystyle \frac{t}{2}}-F$	$S^{alter}={\pi }_{ft}^{\ast }={\displaystyle \frac{1}{9}}{\displaystyle \frac{{\left(2t_{ct}+t_{ft}\right)}^2}{\left(t_{ct}+t_{ft}\right)}}-F$
Labeling phase (1988–2011)
Using FT labels becomes the new strategy of FT firms, in order to reach a larger market potential. This phase results in the first conventional firm(s) (considering) supplying FT products. Specific model features: two duopolists, with the conventional firm moving on the fairness continuum to the position of the FT firm.
Market shares	$x^{\ast }=1-x^{\ast }=1/2$	$x^{\ast }=1-x^{\ast }=1/2$
Prices	$p_{ct}^{\ast }=p_{ft}^{\ast }=t+c$	$p_{ct}^{\ast }=p_{ft}^{\ast }={\displaystyle \frac{1}{3}}(2t_{ct}+t_{ft})+c$
Profits	${\pi }_{ct}^{\ast }={\pi }_{ft}^{\ast }={\displaystyle \frac{1}{2}}t-F$	${\pi }_{ct}^{\ast }={\pi }_{ft}^{\ast }=0$
Wealth transfers	$S^{label}={\pi }_{ct}^{\ast }+{\pi }_{ft}^{\ast }=t-2F$	$S^{label}={\pi }_{ct}^{\ast }+{\pi }_{ft}^{\ast }$
		$={\displaystyle \frac{1}{3}}\left(2t_{ct}+t_{ft}\right)-2F$
Mainstream phase (2011 – now)
For strategic reasons also the FT firm decides to lower the amount of wealth transfers to (potentially) increase market share. Eventually, both firms start supplying FT products from a location in the middle of the fairness continuum, resulting in the start of commoditization. Specific model features: two duopolists, both willing to move along the fairness continuum. Degree of product heterogeneity becomes important.*
Market share	$x^{\ast }=1-x^{\ast }=1/2$	$x^{\ast }=1-x^{\ast }=1/2$
Prices
-homogeneous	$p_{ct}^{\ast }=p_{ft}^{\ast }=c$	$p_{ct}^{\ast }=p_{ft}^{\ast }=c$
-heterogeneous	$p_{ct}^{\ast }=p_{ft}^{\ast }=t/2+c$	$p_{ct}^{\ast }=t_{ft}/2+c{p}_{ft}^{\ast }=t_{ct}/2+c$
Profits
-homogeneous	${\pi }_{ct}^{\ast }={\pi }_{ft}^{\ast }=0$	${\pi }_{ct}^{\ast }={\pi }_{ft}^{\ast }=0$
-heterogeneous	${\pi }_{ct}^{\ast }={\pi }_{ft}^{\ast }={\displaystyle \frac{t}{4}}-F$	${\pi }_{ct}^{\ast }={\displaystyle \frac{t_{ft}}{4}}-F{\pi }_{ft}^{\ast }={\displaystyle \frac{t_{ct}}{4}}-F$
Wealth transfers
-homogeneous	$S^{main}={\pi }_{ct}^{\ast }+{\pi }_{ft}^{\ast }=0$	$S^{main}={\pi }_{ct}^{\ast }+{\pi }_{ft}^{\ast }=0$
-heterogeneous	$S^{main}={\pi }_{ct}^{\ast }+{\pi }_{ft}^{\ast }=t/4-F$	$S^{main}={\pi }_{ct}^{\ast }+{\pi }_{ft}^{\ast }=\left(t_{ct}+t_{ft}\right)/8-F$

*For reasons of comparison with the homogeneous product case, we assume that the firms locate halfway the fairness continuum in heterogeneous product markets. This happens if firms differentiate to the same degree, implying equal $t_i$ for both products.

Figure 2. Market situation in the charity phase.

Figure 3. Illustration of the market situation in the alternative phase (for $t_{ft}>t_{ct}$).

Table 2. Comparison of wealth transfers between different phases of mainstreaming fairtrade.

Phases	Differences for symmetric t	Differences for asymmetric t
Charity – Alternative*	$n/a$	$n/a$
Alternative – Labeling
Total	$S^{alter}⋛S^{label}\iff {\displaystyle \frac{t}{2}}-F⋛0$	$S^{alter}⋛S^{label}\iff {\displaystyle \frac{1}{3}}(2t_{ct}+t_{ft})$
		$\left(1-{\displaystyle \frac{1}{3}}{\displaystyle \frac{2t_{ct}+t_{ft}}{t_{ct}+t_{ft}}}\right)-F⋛0$
Firm	$\begin{array}{l}{S_{ct}}^{alter}⋛{S_{ct}}^{label}\iff {\displaystyle \frac{t}{2}}-F⋛0\\ {S_{ft}}^{alter}={S_{ft}}^{label}\end{array}$	$\begin{array}{l}{S_{ct}}^{alter}⋛{S_{ct}}^{label}\iff {\displaystyle \frac{1}{6}}(2t_{ct}+t_{ft})-F⋛0\\ {S_{ft}}^{alter}⋛{S_{ft}}^{label}\iff t_{ct}⋛t_{ft}\end{array}$
Per product	$\begin{array}{l}\overline{s}{{}_{ct}}^{alter}⋛\overline{s}{{}_{ct}}^{label}\iff t⋛2F\\ \overline{s}{{}_{ft}}^{alter}=\overline{s}{{}_{ft}}^{label}\end{array}$	$\begin{array}{l}\overline{s}{{}_{ct}}^{alter}⋛\overline{s}{{}_{ct}}^{label}\iff {\displaystyle \frac{1}{3}}(2t_{ct}+t_{ft})-2F⋛0\\ \overline{s}{{}_{ft}}^{alter}⋛\overline{s}{{}_{ft}}^{label}\iff t_{ct}⋛t_{ft}\end{array}$
Labeling – Mainstream**
Total	$S^{label}⋛S^{main}\iff {\displaystyle \frac{3}{4}}t-F⋛0$	$S^{label}⋛S^{main}\iff {\displaystyle \frac{13}{24}}{t}_{ct}+{\displaystyle \frac{5}{24}}{t}_{ft}-F⋛0$
Firm	$\begin{array}{l}{S_{ct}}^{label}⋛{S_{ct}}^{main}\iff {\displaystyle \frac{3}{8}}t-{\displaystyle \frac{1}{2}}F⋛0\\ {S_{ft}}^{label}⋛{S_{ft}}^{main}\iff {\displaystyle \frac{3}{8}}t-{\displaystyle \frac{1}{2}}F⋛0\end{array}$	$\begin{array}{l}{S_{ct}}^{label}⋛{S_{ct}}^{main}\iff {\displaystyle \frac{1}{3}}{t}_{ct}+{\displaystyle \frac{1}{24}}{t}_{ft}-{\displaystyle \frac{1}{2}}F⋛0\\ {S_{ft}}^{label}⋛S_{ft}^{main}\iff {\displaystyle \frac{5}{24}}{t}_{ct}+{\displaystyle \frac{1}{6}}{t}_{ft}-{\displaystyle \frac{1}{2}}F⋛0\end{array}$
Per product	$\begin{array}{l}\overline{s}{{}_{ct}}^{label}⋛\overline{s}{{}_{ct}}^{main}\iff {\displaystyle \frac{3}{4}}t-F⋛0\\ \overline{s}{{}_{ft}}^{label}⋛\overline{s}{{}_{ft}}^{main}\iff {\displaystyle \frac{3}{4}}t-F⋛0\end{array}$	$\begin{array}{l}\overline{s}{{}_{ct}}^{label}⋛\overline{s}{{}_{ct}}^{main}\iff {\displaystyle \frac{2}{3}}{t}_{ct}+{\displaystyle \frac{1}{12}}{t}_{ft}-F⋛0\\ \overline{s}{{}_{ft}}^{label}⋛\overline{s}{{}_{ft}}^{main}\iff {\displaystyle \frac{5}{12}}{t}_{ct}+{\displaystyle \frac{1}{3}}{t}_{ft}-F⋛0\end{array}$

*The structure of these phases is difficult to compare, and as such we have made additional assumptions as explained in the text.

**We have put here only the results for heterogeneous product markets. As in homogeneous product markets no profits are generated, wealth transfers are lower in the mainstream phase.

Table A.1. Overview of outcomes.

	Conventional firm	FT firm
Market share functions	$x^{\ast }=\frac{p_{ft}-p_{ct}+a_{ft}{t}_{ft}+a_{ct}{t}_{ct}}{t_{ct}+t_{ft}}$	$1-x^{\ast }=\frac{p_{ct}-p_{ft}+(1-a_{ft})t_{ft}+(1-a_{ct})t_{ct}}{t_{ct}+t_{ft}}$
Best response functions	$p_{ct}=\frac{p_{ft}+a_{ct}{t}_{ct}+a_{ft}{t}_{ft}+c}{2}$	$p_{ft}=\frac{p_{ct}+\left(1-a_{ct})t_{ct}+(1-a_{ft}\right)t_{ft}+c}{2}$
Nash prices	$p_{ct}^{\ast }=\frac{1}{3}(t_{ct}+t_{ft}+a_{ct}{t}_{ct}+a_{ft}{t}_{ft})+c$	$p_{ft}^{\ast }=\frac{1}{3}(2t_{ct}+2t_{ft}-a_{ct}{t}_{ct}-a_{ft}{t}_{ft})+c$
Nash market shares	$x^{\ast }=\frac{1}{3}\frac{t_{ct}+t_{ft}+a_{ct}{t}_{ct}+a_{ft}{t}_{ft}}{t_{ct}+t_{ft}}$	$1-x^{\ast }=\frac{1}{3}\frac{2t_{ct}+2t_{ft}-a_{ct}{t}_{ct}-a_{ft}{t}_{ft}}{t_{ct}+t_{ft}}$
Nash profits	${\pi }_{ct}^{\ast }=\frac{1}{9\left(t_{ct}+t_{ft}\right)}(t_{ct}+t_{ft}+a_{ct}{t}_{ct}$	${\pi }_{ft}^{\ast }=\frac{1}{9\left(t_{ct}+t_{ft}\right)}(2t_{ct}+2t_{ft}$
	$+a_{ft}{t}_{ft}{)}^2-F$	$-a_{ct}{t}_{ct}-a_{ft}{t}_{ft}{)}^2-F$

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