A Positive Analysis of Fairtrade Certification

The Fairtrade program transfers income to farmers by establishing a price floor and an alternate distribution channel that bypasses intermediaries between the raw commodity and world markets. I develop a model of the international commodity supply chain, with monopolistically competitive final goods producers and consumers who value the ethical quality of goods. A small number of oligopsonistic intermediaries purchase the raw commodity from farmers in a given country and then sell to final goods producers in the world market. I consider the effects of a Fairtrade program that is too small to have an effect on the world price of the commodity. I show that the Fairtrade program decreases the intermediaries' market power and consequently, even farmers that are not selected into the program receive a higher wage than in the absence of the program. I establish the Pareto optimal Fairtrade price and assess the overall efficiency of the program. The program is a more efficient way to transfer income to farmers than a direct transfer equal to the premium commanded by certified products if the Fairtrade price is not set too high above the efficient wage for farmers. If the number of intermediaries were large, however, then the direct transfer is more efficient than the program even for small binding price floors. Keywords: certification, Fairtrade, oligopsonistic intermediaries, supply chain.