Eco-Labels and the Economic Recession
In recent years Eco-labelling has become more and more commonplace, with many brands adopting the well-known eco-labels for fair trade or the leaping bunny which represents opposition to animal testing.
Dr Jibonayan Raychaudhuri at the School of Economics, UEA, has studied the consumer choice for eco-labelled products and the effects that the recent economic recession has had on their sales. Despite the large market share of these eco-labelled products, there is still no clear understanding about how consumers make choices in this market. In addition to the price and quality, consumers also evaluate the “public good” features of the product. They might be concerned about the environment when deciding to buy a low carbon footprint product, concerned about their health when buying an organic product, or about social justice when deciding towards a fair-trade product.
To investigate this question, he analysed the loyalty cards’ data from a noted UK supermarket chain. The results from this analysis show, surprisingly, that the share of consumer expenditure on fair trade products seems to hold up during the recession while the share of organic products seems to fall. This finding contradicts the traditional price theory, which would predict that during an economic downturn, consumers become more price sensitive. Organic and fair-trade variety products are notoriously more expensive than their non-labelled alternatives, therefore, the sales shares of these products should fall relative to the sale of conventional groceries. What accounts for this observed departure of buyer behaviour from the predictions of standard price theory?
Two behavioural economics models suggest a plausible explanation for these findings. The first is a “model of salience” and the second is a “model of reputation signalling”. The salience model states that consumers evaluate products by comparison and focus on product attributes that are most noticeable or important to the consumer, these attributes are “salient”. The recession led to a negative shock in all consumer budgets, therefore, the salience model predicts that consumers would become relatively less price sensitive and instead focus more on the public good qualities of products. In the signalling model, moral motivations and identity play a key role in the consumer’s decision-making process, therefore consumers will derive utility not only from the direct consumption of a good but also from moral costs or rewards associated with the public good features of the product.
In conclusion, the market for eco-labels is far from being clearly understood by economists. Future work would involve a more detailed analysis of situations under which eco-labels can command a price premium or lead to increased sales.