Ethically Produced Products

Ethically produced products are typically manufactured under three conditions: First, the firm should attempt to have positive stakeholder relations; for example, a commitment to diversity in hiring and installing safe production practices. Second, it must use sound environmental practices, such as using ecofriendly products and technology. Finally, it should [Page 132]also demonstrate concern about human rights by not employing child labor or forced labor in factories located in the developing world.

In an experiment that tested consumer willingness to buy ethically produced products, results showed that premium consumers would pay an additional $1.40 per pound for fair trade coffee

Source: iStockphoto

The market for ethically produced consumer products has soared over the last decade, and sales are expected to reach $57 billion by 2011. Research has shown that U.S. consumers want goods from ethical manufacturers but are having a hard time finding products at reasonable prices. During recessionary times, there is less of an attraction to such goods because of higher prices.

A recent study by Remi Trudel and June Cotte involved three experiments—two on coffee purchasers and the other on T-shirt purchasers. In all cases, they demonstrated that not only does it pay to be good but firms may be punished if they are bad.

In the coffee experiment, consumers of the product were divided into three groups with different ethical manipulations. The results showed that although premium consumers would pay an additional $1.40 per pound as a reward for Fair Trade practices, the punishment/discount for unfair practices was almost twice the effect of positive information (i.e., $2.40 per pound) on the coffee consumers' willingness to pay.

In the T-shirt experiment, the goal was to look at degrees of ethical behavior. Were consumers ready to pay for 100 percent ethically produced shirts versus one that is 50 percent or 25 percent ethically produced? To find out, cotton T-shirt users were divided randomly into five groups, and information was provided on a fictitious manufacturer. The first four groups were told that the shirts had 100 percent, 50 percent, 25 percent, and 0 percent cotton, respectively. The fifth (control) group received no information. The groups were also shown a short paragraph detailing the detrimental effects of nonorganic cotton. The subjects were willing to pay a premium for all levels of ethical production, and they would discount an unethical product more deeply than they would reward an ethical one. Yet, there was not a linear relationship between increasing levels of ethical production and increasing price premiums. The 25 percent organic cotton received a mean price of $20.72, which was not significantly different from 50 percent ($20.44) and 100 percent ($21.21). It appears that once the ethical threshold is reached, consumers agree to pay a premium for the products.

The final study tested whether, if consumers expected companies to behave ethically, that changed how much consumers rewarded and punished behavior, especially if they felt that the companies are in it for the money and for maximizing profits and are not concerned about ethics. The respondents' attitudes toward the firms were measured and labeled as high expectation or low expectation, and they were split into three groups that [Page 133]received positive, negative, or no information about the manufacturer and their methods. Yet again, it was found that irrespective of their expectations, consumers were willing to pay more for ethical goods than unethical ones, or ones for which they had no information, indicating reward for socially responsible behavior. Similarly, negative information had a much greater effect on consumer response than positive information. Subjects in the study punished unethical goods with a bigger discount (approximately $2 below the control group) than they rewarded ethical ones with premiums (approximately $1 above the control group). As far as consumer attitudes are concerned, individuals with high expectations handed out larger rewards and punishments than those with low expectations.

...