The price elasticity of demand of Fair Trade coffee

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School of Economics | Master's thesis
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Demand for Fair Trade certified products has been continuously growing during the past decade. In 2008 the sales of all Fair Trade products grew by 57% showing the strong growth in this market. However, little research has been done on the European market on the demand and price elasticity of demand of Fair Trade products. Fair Trade is a voluntary certification system, where certain conditions are set on the production of mainly agricultural products. Fair Trade goods produced according to the Fair Trade criteria are guaranteed a minimum price above the world market price, as well as a social premium on top of the price. An important part of the Fair Trade initiative is the market for these products in the developed countries. The aim of this study is to investigate the factors affecting the demand for Fair Trade coffee in Finland and calculate the price elasticity of demand for this type of coffee. Thus the research aims to give an answer to why consumers are prepared to pay a higher price for Fair Trade products than their conventional substitutes. The impacts of the price elasticity of demand on retail profits are also commented. The research questions were answered by conducting a literature review on previous research, as well as formulating a theoretical model of price elasticity of demand and a linear regression model based on price and sales data from a 3,5-year period from a Finnish retail chain. The findings of the study were that demand for Fair Trade coffee depends on functional characteristics such as taste, brand, sales location and price, as well as supplementary characteristics like altruism, impure altruism (warm-glow) and the desire to gain esteem by purchasing Fair Trade products. From the three theoretical models based on the supplementary utility it can be concluded that price elasticity of demand depends on the price difference between regular and Fair Trade coffee as well as the share of Fair Trade coffee demand compared to total coffee consumption. The linear regression model is based mainly on functional utility, and shows that the price elasticity of demand for Fair Trade coffee is inelastic (-0.50), while the same figures for conventional and Utz certified coffee are elastic. However, the explanation power of the Fair Trade regression model remains quite low partly due to the inability to include variables describing the supplementary utility gained by purchasing Fair Trade coffee. In conclusion, the inelasticity of demand of Fair Trade coffee allows retailers to make use of anti-competitive behaviour such as differentiation and product bundling in order to discriminate between customers and gain profits on the market.
Fair Trade certification, coffee, price elasticity of demand, inelastic demand, Reilu kauppa, Reilun kaupan sertifikaatti, kahvi, kysynnän hintajousto, joustamaton kysyntä
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