The ethical consumer’s willingness to pay for coffee:A comparison of donations, Fair Trade, organic, and cause-

related marketing coffees

Carola Grebitus, Monika Hartmann, Nina LangenUniversity of Bonn

Institute for Food and Resource EconomicsDepartment of Agricultural and Food Market Research

Contact information: Carola Grebitus – carola.grebitus@ilr.uni-bonn.de

[Contributed] paper prepared for presentation at the II Workshop on:Valuation Methods in Agro-food and Environmental Economics

“Experimental Auctions: theoretical background and empiricalapplications”

Barcelona, 2nd - 3rd July 2009

Copyright 2009 by C arola Grebitus, Monika Hartmann, Nina Langen. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice

appears on all such copies.

The ethical consumer’s willingness to pay for coffee: A comparison of donations, Fair

Trade, organic, and cause-related marketing coffees

Abstract

The overall coffee market is stagnating but several niches are growing. To be successful in

the market, differentiation of coffee can be achieved by attributes like organic, Fair Trade

(FT) and cause-related marketing (CRM) activities as a form of donations. This study

investigates ethical consumers’ willingness to pay (WTP) for these attributes. We conducted

experimental auctions in Germany to investigate consumers’ WTP for differently labelled

coffee. We compare the application of Vickrey auctions and the BDM mechanism. Also, we

analyze the WTP measured by auctions in contrast to the WTP measured by choice

experiments that we conducted in 2008 in Germany. Empirical results show that consumers

are willing to pay a premium for these product features. Due to this WTP of a premium for an

altruistic concern, these consumers can be characterized as ethical consumers. We show

that consumers have a higher WTP for the attribute FT compared to the other tested coffee

features which leads to the conclusion that FT has a higher reputation. Regarding

methodological issues our results show only marginal differences in applying either Vickrey

auctions or applying the BDM mechanism. Results for WTP measured applying auctions and

choice experiments indicate that for organic and FT coffee choice experiments lead to higher

WTP compared to auctions while the opposite is to state for CRM coffee.

1. INTRODUCTION

Nowadays, the overall coffee market is stagnating (1-2% global growth-rate) but several

niches are growing (BYERS ET AL. 2008). Differentiation of coffee can be achieved by

additional benefits such as convenience, ambiance, organic, Fair Trade (FT) and cause-

related marketing (CRM) activities (e.g. GIBBON 2005). In this regard, the market for certified

coffee, e.g. FT and organic, grows at double digit rates since 2000. FT labelled coffee shows

a growth rate of 46% worldwide between 2004 and 2006 and 14% in 2008 in Germany

(BYERS ET AL. 2008; TRANSFAIR 2008). Organic coffee has a market share of 3.5% in

Germany and shows as well double digit growth (BLE 2008). Besides single certified coffee

double certified coffee is a new trend. Worldwide nearly 50% of the FT coffee is double

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certified carrying also an organic certification (BYERS ET AL. 2008). In Germany 60% of the FT

coffee is double certified (TRANSFAIR 2008). The so called cause-related marketing (CRM) is

a marketing tool where the product purchase leads to a target-oriented donation promoted on

the product by label. This means that a part of the sales revenue of the promoted product is

a donation to the respectively promoted project. CRM is also increasingly applied. One

recent campaign of Germany’s fourth biggest coffee producer Dallmayr promotes that per

sold package of the coffee “Ethiopia” five trees are planted in Ethiopia. From May 2008 to

March 2009 3,840000 trees have been planted – with a value of 0.12 € for five trees (MFM

2009) 92,160 € were collected by this CRM campaign (DALLMAYR 2009). The campaign is

close to a regular donation and comparable to FT.

FT and to a certain extent also organic products are considered as ethical products

because the production of these products follows specific rules which restrict the output of

environmental damage, constitute specific working conditions as well as animal well being

and have the goal to reduce poverty by empowerment of marginalised producers etc. (DE

PELSMACKER ET AL. 2005). Especially poverty reduction is of great importance not only for

governments1 but also for the so called ethical consumers (e.g. SCHULZ 2008, HARRISON ET

AL. 2005). This consumer segment accounts for ethical concerns, such as fair wages, in their

purchase decision. The success of e.g. FT products in Western countries reveals the

increasing importance of ethical purchase behaviour for consumers and the battle for better

livelihoods all over the world. Purchasing FT products or donations to e.g. development aid

organisations for instance in form of CRM are two of the most common options for people in

industrialised countries to make an individual contribution to poverty alleviation.

But which tool of consumer action is favoured by German customers when they face

the possibility to support producers in developing countries: donations, purchasing FT or

organic or CRM products? We have to investigate which (product) features play a major role

and whether the concerns about working conditions, fair wages etc. are just lip services or

have actually ‘the power’ to change consumption behaviour. Moreover, we have to analyze if

1 E.g. in 2005 1.4 billion people in developing countries were living below the poverty line, having less than $1.25 available per day (WORLDBANK 2008).

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the responsible and conscious FT consumer takes care about the differences between FT

and donations. So far, studies exist on ethical consumption and consumerism regarding FT

(e.g. LOUREIRO AND LOTADE 2005; PELSMACKER ET AL. 2005). Others approach the reasons

behind people’s donation habits (e.g. HEIDBÜCHL 2000). But up to now, there is no economic

assessment of consumers’ willingness to pay (WTP) combining these two consumer

instruments of producer support. The aim of our study is to investigate these issues by use of

coffee purchase as an example. We choose coffee as a research object because it is the

favourite beverage of German consumers (DEUTSCHER KAFFEEVERBAND 2009). Therefore,

we can assume that consumers really care about their coffee choice and that the results will

benefit from consumers high involvement. Also, coffee is a typical product from developing

countries. Thus, it is well suited for a CRM campaign, especially a donation to a charity

organisation working in a coffee producing country as the example of Dallmayr Ethiopia

shows.

Against this background, we conducted experimental auctions in Germany – one of

the biggest coffee markets (DEUTSCHER KAFFEEVERBAND 2007) – to investigate consumers’

WTP for differently labelled coffee. Main objective was to measure the premiums consumers

are willing to pay in an experimental auction setting for sustainable and ethical coffee

production as well as for CRM activities comparable to FT. A second objective is the

comparison of this WTP with the WTP we found in a hypothetical choice experiment that we

conducted in 2008. Both studies took place in Germany. The remainder of the paper is as

follows: in the next section theoretical background information is given. In section 3 the

methodological background is described. Section 4 provides estimation results from the

econometric analysis. The fifth section briefly compares consumers’ WTP for coffee

measured by auctions and by choice experiments. Some concluding remarks and an outlook

on further research are given in section 6.

2. THEORETICAL BACKGROUND

Ethical consumption as a form of market behaviour was on the rise in the last three decades

(HARRISON ET AL. 2005). The definition of the ethical consumer is seldom exclusive and

mostly descriptive. HARRISON ET AL. (2005) explain ethical purchase behaviour as a

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traditional consumption plus a concern. The assumption that a consumer is purchasing the

cheapest good which is fitting his needs leads to the definition of the traditional purchasing. If

people deviate from the normal assumption and consider other concerns like working

conditions for disadvantaged producers in developing countries or absence of child labour in

their purchase, then their shopping decision can be called ethical purchase behaviour. The

motives of people to buy a certain kind of product are manifold. They vary from a concern for

environmental issues over political to religious, spiritual and social motives. The one

important common point which is independent from the motives of consumption is that ethical

consumers bear in mind the effect their purchase decision has not only on themselves but

especially “on the external world around them” (HARRISON ET AL. 2005). TALLONTIRE ET AL.

(2001) define ethical consumers as customers feeling responsible towards society and De

PELSMACKER ET AL. (2005) note that these feelings are expressed by means of their

purchase behaviour. Combining these definitions we arrive at the relationship between FT

and charitable giving, i.e. donations. Besides this, in the context of FT it is often talked about

ethical or responsible consumers (RUWET 2007).

Following PRILLER AND SOMMERFELD (2005) by defining donations as a form of social

participation, a contribution to welfare production which is able to maintain and open up

social connecting forces in modern societies, we can state that one precondition out of a

bundle of motives for a donation is that the giving individual is an ethical being. And

describing according to NICHOLLS AND OPAL (2005) FT as a kind of an alternative market

mechanism which is neither donations nor non-profit but a form of political and ethical

consumption, an individual buying fairly traded products is an ethical consumer. Therewith,

we can link ethical consumption patterns, donations, FT and CRM.

2.1. Fair Trade in Germany

As can be seen in table 1 in recent years the number and the sales of FT products

increased. The overall sales volume of FT products with the FT certificate is 142 Mio. € in

2007 (TRANSFAIR 2008). 70% of all FT products are also certified organic. Coffee is the front

runner of the FT products in Germany: it has more than 50% share of sales (LZ NET 2007);

with a market share of 1% in 2005 (KRIER 2005).

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Table 1: Fair Trade sales figures in Germany 2004-2007

YearSales volume of fair traded pro-ducts [Mio €]

% to PY

Sales volume with Fair Trade labelledproducts [Mio €]

% to PY

coffeesales[t]

% to PY

Fair Trade and organic certified [%]

2004 99 7 n.s. n.s. n.s. n.s. n.s.2005 121 22 73 25 3600 9 642006 155 30 110 51 4000 18 702007 193 23 142 29 4600 11 > 70Source: FORUM FAIRER HANDEL (2004, 2006, 2007, 2008), n.s. = not specified.

The German consumer initiative stated that women are buying more (40% buy FT)

than men (33% buyers), that higher income classes (more than 2500 €/month) are more

likely FT shoppers than people with a lower income and that higher educated people (high

school) are more often customers (50%) than less educated (32%) (Verbraucher Initiative

2007). In a consumer survey conducted in 2008 in Germany (n=484) 53% of the participants

stated to purchase at least one FT product often or sometimes and 65% stated to make

donations to developmental purposes. The survey analyzed characteristics of FT shoppers

and donors. Table 2 shows a comparison of the results. In contrast to the study of the

German consumer initiative in this survey gender has no influence on the likelihood of buying

FT products. But results confirm as well the high education and income level of FT shoppers.

Furthermore, evidence is given that age as well as church membership is an important

determinant of giving to charity but not for FT shopping (LANGEN, GREBITUS AND HARTMANN

2009).

Table 2: Comparison of Fair Trade shoppers and donors

Fair Trade Shoppers Donors

Gender, children, activities have no significant influenceIncome > 2000 €/month increases likelihood to buy

Income 1300 and 2600 €/month as border increases likelihood to donate

Education: highly significant for high education level

Education has no significant influence

Age has no significant influence Older consumers donate significantly moreChurch membership has no significant influence

Church membership increases probability of donation

Source: LANGEN, GREBITUS, HARTMANN (2009).

2.2 Donations in Germany

2.2.1. Donation volume

Regularly available numbers regarding donations to non-profit organisations (NGOs) in

Germany are provided by the Gesellschaft für Konsumforschung (GfK), Deutscher

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Spendenmonitor by TNS Infratest, and the National Income statistic (see table 3). Their

results differ strongly with respect to the donation amounts (from 2.6 to 7 billion €/year) and

the donation purpose in Germany (PRILLER AND SOMMERFELD 2005). For instance TNS

INFRATEST (2008) reports that development projects benefit of about 19% of the 2.8 Billion €

which have been donated in 2007 in Germany. GfK (2008a) reports different percentages on

a different basis: in the first half of 2008 9.3% of humanitarian aid, which is 80% of the total

donation volume, was given to long-term development projects and 18.7% went to first aid.

Table 3: Charitable giving – survey data from GermanySurvey Year Billion € Method

2005 2.42006 2.0GfK Charity Scope2007 2.0

Respondents at least 10 years old, 10,000 interviews, diary, monthly

2005 3.52006 3.4Deutscher Spendenmonitor2007 2.8

Respondents at least 14 years old, 4,000 interviews, Face-to-Face, yearly

National Income Statistic 2001 2.9 Taxpayer, complete inventory countSource: SOMMERFELD (2008) for the data until 2006, data for 2007 from GFK (2008a) and TNS INFRATEST (2008), data for the national income statistic from BUSCHLE (2006).

2.2.2. Socio-demographic characteristics of donors

The willingness to donate and the amount of donations depend on age (younger people

donate less), economic situation which often depends on education level (wage earner

donate more than trainees or unemployed people, retirees and housewives donate most),

religious denomination (raises the probability of contribution, while there is not much of a

difference between Catholics or Protestants) and the number of children in the household

(positive correlated with donation) (BUSCHLE 2006). Related to the entity of taxpayers most of

the donors can be found among married couples with three or more children. No differences

in terms of donation habits can be found regarding gender (GFK 2008b). In 2008 more than

50% of the monetary donations come according to GFK (2008b) from people older than 60

years (which are only 26% of the panel) and more than 50% of these are given by those

people older than 70 years.

3. METHODOLOGICAL BACKGROUND

3.1. Experimental auctions

For centuries auctions have been used as a price-discovery mechanism. Experimental

auctions combine the advantages of stated and revealed preference methods and reduce the

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shortcoming2 of both methods. The aim of experimental auctions is the identification of

differences in people’s valuation of goods or treatments and to present an approximation of

the mean WTP for a good (LUSK AND SHOGREN 2007).

According to LUSK AND SHOGREN (2007) we can state that the bids in experimental

auction are revealed preferences because they are achieved by the use of real money and

real products and therefore create a real market. The bids in each auction reflect a bidders

WTP or value for the good or service. Compared to stated preference methods the

advantages of experimental auctions are that the exchange mechanisms create incentives

for the test persons to think about their real WTP for the product or service. Compared to

revealed preference methods the clear advantage of experimental auctions is that the

valuation of a product or service is directly obtained. Furthermore, individuals WTP are easily

determined by experimental auctions (LUSK AND SHOGREN 2007).

The type of auction mechanism which is used to identify the market price and the

winner in the auction is a key aspect of experimental auctions (LUSK AND SHOGREN 2007).

Different types of auction mechanisms are known. The most important feature of a

mechanism is being incentive compatible which means that participants have to deal with

real purchase situations in which they are not able to influence the price of the product in

question with their bid but where they have to state their real WTP for that product because

subjects are obliged to buy the product if their bid was successful. So the test person’s

dominant strategy in an incentive compatible auction is to submit a bid which is exactly equal

to the person’s value for the good or service (WERTENBROCH AND SKIERA 2002; LUSK AND

SHOGREN 2007). We see that “an auction mechanism is incentive compatible if the market

price paid by a person is independent from what” the person bids (LUSK AND SHOGREN 2007,

p.19). Besides this in an incentive compatible auction over- as well as under-bidding is

avoided (WERTENBROCH AND SKIERA 2002). Three incentive compatible and very often used

mechanisms are the second price auction, also known as Vickrey auction, the nth price

auction and the Becker-DeGroot-Marschak (BDM) mechanism. Others are the English

auction and the random nth price auction. These auctions differ with respect to the level of

2 For further information see LUSK AND SHOGREN (2007).

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market interaction as well as feedback, the number of winning people and the market price3.

In theory all these incentive compatible auctions yield the same result and the choice of

auction mechanism comes down to pragmatic concerns (LUSK AND SHOGREN 2007). In our

auctions we applied two different mechanisms – the Vickrey auction and the BDM – to

compare whether the different mechanisms will yield the same results in our experimental

setting. We only applied these two mechanisms as the Vickrey auction can be widespread to

any nth price auction in which participants submit sealed bids for a commodity and the (n-1)

highest bidders win the auction at the nth highest price they have to pay (LUSK AND SHOGREN

2007).

3.2. Vickrey Auction

William Vickrey developed a second price sealed-bid auction, the so called Vickrey auction

1961. In this auction type the bids of the participants cannot be observed by the other

bidders. The winner is the person with the highest bid but pays a price equal to the second-

highest bidden price. Because of the sealed bid procedure where every participant relies on

its own decision and the fact that the highest bidden price will not determine the price which

is paid by the winner, the dominant strategy for all bidding participants is to bid their real

WTP. Therefore the Vickrey auction is theoretically incentive compatible (MCAFEE AND

MCMILLAN 1997; VICKREY 1961). One big advantaged is that explanation to participants and

implementation in this auction type is relatively easy (LUSK AND SHOGREN 2007).

3.3. Becker-DeGroot-Marschak mechanism (BDM)

The BDM mechanism differs compared to the Vickrey mechanism in the rule used to

determine the price the successful bidder has to pay for the product (DAVIS AND HOLT 1993).

The price is randomly determined. Successful winners are those who submit a bid over or

equal the randomly drawn product price (WERTENBROCH AND SKIERA 2002). Therefore, more

than one successful bidder is possible in this auction type. Compared to the second price

auction the chance of successful bidding is higher. This encourages competition among

bidders. The BDM mechanism is theoretically incentive compatible.

3 An overview is given in LUSK AND SHOGREN (2007).

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4. EXPERIMENTAL COFFEE AUCTIONS

4.1. Design of the study

Before describing the design of the study the authors would like to mention that at this point

the data come from a pre-study collected through a grad student experiment at the University

of Bonn, Germany in January 2009. The sample size of the pre-study was n=38 students.

We will repeat this study with a random sample of coffee consumers in summer 2009 with a

sample size of n=200 participants.

The experimental group was divided in two parts. Group A was informed about the

Vickrey auction mechanism which was applied to that group A. In the second group B the

BDM mechanism was applied. In the following we describe the experimental procedure

which was similar for both groups. Both groups were given a numerical example to carefully

illustrate the bidding mechanism, the dominant bidding strategy and the disadvantages of

over- and underbidding. We encouraged the participants to ask questions if things remained

unclear. We also stressed that every bid would be binding and that the successful bidder

actually would have to buy the pack of coffee. Then participants started to submit their bids

for eleven presented coffee packages.

We had three consecutive rounds. Before the first round no additional information

towards the presented coffee was given. Before the second round we provided the test

persons with information regarding Fair Trade and its objectives. Before the third round we

gave information to participants about Menschen für Menschen (MfM), a German non

governmental charity organisation working on projects in Ethiopia. After all bids were

submitted participants filled in a questionnaire which consisted of six sections regarding

purchase and consumption habits in general and regarding coffee in particular; knowledge

about FT; charity organisations in general, their objectives and efficiency; participants’

donation habits, attitudes towards CRM, donations and FT, and socio-demographics.

While the respondents filled in their questionnaires we sorted the bids and identified

the winners of each round. The winners were announced the resulting price for the coffees.

Please note, as the respondents were students they did not have to purchase the coffees.

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However, to keep it incentive compatible they were only informed about this issue after

bidding in the auctions.

Description of coffees used in the auctions

We presented eleven coffees to be found in German supermarkets. To keep the

situation as close to the marketplace as possible we used real coffee packs. However, each

coffee pack carries unique information such as images and different labels. This is a clear

challenge for the interpretation of the results of our auctions. Repeating the study with a full

sample we would create ‘dummies’ that only carry the information (attributes) of interest to

the investigator. This would also allow a better comparison of the WTP measured by the

auction and by the choice experiment. The eleven coffees – 500g each – were presented in

the following order: Melitta Auslese, Café Intención organic and FT, Jacobs Krönung,

Dallmayr Ethiopia, Gut und Günstig (retail brand from Edeka), Tchibo Organic (2 vacuum

packages), Dallmayr Prodomo, Edeka Organic, Gala Nr. 1, Café Intención FT.

As the purpose of this paper is the comparison of FT, organic and CRM coffee we will

discuss results of the five following coffees carrying those labels only as well as one

conventional coffee without any specific labels (Dallmayr Prodomo). The CRM coffee

indicating that from the sales price a project in Ethiopia is promoted was Dallmayr Ethiopia.

The organic coffee was produced by Tchibo Bio. Café Intención was presented as FT coffee

and Café Intención FT and Bio as a double certified (FT plus organic) coffee. Data from the

experimental auction were analyzed using panel data analysis with random effects using

STATA. For further readings see GREENE (2003).

4.2. Empirical results

To analyze WTP of ethical consumers for coffee we investigate WTP for regular coffee, CRM

coffee, organic coffee, FT coffee and double certified organic, FT coffee. The bids for the

coffee packs are the dependent variables. We are estimating individual models for each of

the five coffees. Due to limited space the bids of the third round are not reported in this paper

but can be provided by the authors upon request. The dependent and independent variables

included in the empirical analysis are described in table 4:

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Table 4: Variable description

Table 5 shows the empirical results. As several studies have shown that taste is

among the most important characteristics for consumers to make the food purchase decision

(e.g. GREBITUS 2008) we asked participants whether they expect FT coffee to taste better

than regular coffee. 88% believe that FT coffee tastes as well as or better (2%) than regular

coffee. However, this had no significant influence on WTP for any of the five compared

coffees.

Dependent variable Description Mean Std. dev.Coffee Regular coffee Dallmayr Prodomo 1.90 1.43Coffee CRM Coffee Dallmayr Ethiopia with NGO label

(MfM – Menschen für Menschen)2.29 1.72

Coffee organic Coffee Tchibo with organic label 1.91 1.77Coffee FT Café Intención with FT label 2.38 2.00Coffee organic and FT Café Intención with Organic and FT label 2.43 2.03Independent variable Description Mean Std. dev.Read product label Dummy variable equal to one if participant

reads product labels. 0 if otherwise.0.69 0.46

Knowledge FT Categorical variable with 7: very knowledgeable to 1: no knowledge at all.

3.00 0.84

Knowledge NGO (MfM) Categorical variable with 7: very knowledgeable to 1: no knowledge at all.

2.54 0.80

Knowledge regarding efficiency of FT

Categorical variable with 7: very knowledgeable to 1: no knowledge at all.

2.31 0.97

Knowledge regarding efficiency of NGO (MfM)

Categorical variable with 7: very knowledgeable to 1: no knowledge at all.

2.30 0.99

Knowledge regarding objectives of FT

Categorical variable with 7: very knowledgeable to 1: no knowledge at all.

3.27 0.83

Importance of organic Categorical variable with 7: very important to 1: not important at all.

4.97 1.39

Importance of production w/o child labour

Categorical variable with 7: very important to 1: not important at all.

5.97 1.17

Importance of high quality Categorical variable with 7: very important to 1: not important at all.

6.29 0.70

Taste of FT better Categorical variable with 3: better, 2: no difference, 1: worse.

4.86 16.27

Donating to charity Dummy variable equal to one if participant was donating within the last year. 0 if otherwise.

0.69 0.47

CRM is useful 6.06 0.83CRM is a marketing gag 5.40 1.39CRM can be used instead of donations

9.06 22.35

CRM can be used instead of FT purchases

Categorical variable with 1: I do not agree at all to 7 I agree very much

5.91 16.15

Gender (female) Dummy variable equal to one if participant female. 0 if otherwise.

0.77 0.42

Vickrey mechanism Dummy variable equal to one if participant was bidding following the Vickrey mechanism. 0 if (s)he was following the BDM mechanism.

0.50 0.50

Information about FT (in round 2)

Variable to define the presence of addi-tional information on FT in round two being 0 for round 1 and being 1 for round two.

0.5 0.50

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Analyzing whether consumers are willing to pay higher prices for FT/ organic coffee

means at the same time to investigate whether they are paying attention to product labelling.

However, asking especially whether participants read the product label 66% stated that they

are reading product labels when making their purchase decision. Nevertheless, we can only

state a significant negative effect for CRM coffee, meaning that those consumers who are

paying attention to product labels have a lower WTP for this type of coffee. This is a rather

unsatisfying result as manufacturers communicate their causes/motives mainly via labels on

the package. Moreover, we asked for donations to charity in general to include this as ethical

shopping behaviour into the analysis. 69% of the sample stated that they donated to charity

within the last 12 months. However, this behaviour does not seem to determine consumers

WTP for the different coffees. There is no significant effect to state.

Afterwards, we tested for influence of knowledge regarding FT and NGOs on WTP for

the different coffees. The results indicate that consumers who are more knowledgeable

regarding FT tend to have a lower WTP for all types of coffee. Only those who have

additionally a higher knowledge with respect to the efficiency of FT show a higher WTP for

FT coffee. The specific knowledge towards objectives of FT has no significant influence on

the WTP for coffee. One possible explanation for these results might be that consumers

informed about the well-being of coffee producers are more sceptical in general towards all

available coffees in the market. They do not seem to hold trust against FT labelled coffee.

Thus, coffee manufacturers do not have the chance to reach these customers through

communicative strategies in the supermarket via labels. They would need to implement other

activities. One might argue that for this type of customer direct communication through

credible communicators would be most effective. Nevertheless, being explicitly informed

about the efficiency of FT increases at least the WTP for FT.

Regarding the knowledge of the NGO ‘Menschen für Menschen’ increases the WTP

for all coffees except the CRM coffee – which is exactly the coffee carrying the label of

‘Menschen für Menschen’. This result leads to the conclusion that consumers might become

suspicious if manufacturers introduce those labels as WTP increases for all other coffees but

the CRM coffee. One other reason could be that more than 50% of the sample stated to have

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no knowledge regarding this NGO at all. Furthermore, those consumers who stated to have

some knowledge regarding the efficiency of ‘Menschen für Menschen’ have a lower WTP for

all coffees.

The next part included important product features. We investigated whether organic

production, production without child labour and high product quality determine the WTP for

coffee. Only the quality of the product shows significant positive effects for all coffees

meaning that the more important quality is for consumers the higher their WTP. As all coffees

have approximately the same coefficients consumers seem not to differentiate between the

coffees in terms of product quality. This might be an unsatisfying result for the coffee brands

especially labelled as usually their manufacturers try to create an additional benefit for

consumers via the specific quality – whether it is organic, FT, or cause-related.

Then, we analyzed CRM as determinant for WTP for the different coffees. Whether

CRM is thought as a useful tool or a marketing gag of the coffee companies has no

significant influence. Those consumers who think that CRM can be used instead of donations

to charity have a lower WTP for organic coffee, while those who think CRM can be used to

substitute the purchase of FT have a higher WTP for organic coffee. This leads to the

assumption that consumers differentiate between FT and donations. However, this does not

seem to have an effect on FT and CRM coffee itself. Organic coffee customers might have a

different point view in this case. Regarding socio-demographics we only included gender as

participants were grad students only. It turns out that males tend to have a higher WTP for all

coffees except the CRM coffee. This is especially evident for organic and FT coffee. This

result is contrary to the study by the Verbraucher Initiative (2007) were female consumers

were found to be main shoppers of FT products.

As we tested for differences between BDM and Vickrey as bidding mechanisms we

included a dummy variable being 1 if the applied mechanism was a Vickrey auction. Results

show that there are no differences between the two methods for our sample. The introduction

of additional information before a second round of auctions had only a significant negative

influence on the WTP for organic coffee.

The overall model fit is satisfying for consumer data with an overall R2 of 0.56 to 0.68.

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Table 5: Empirical results from experimental coffee auctionsCoffee Coffee CRM Coffee Organic Coffee FT Coffee Organic and FT

Coef. z-value a Coef. z-value a Coef. z-value a Coef. z-value a Coef. z-value a

Taste of FT better -0.003 -0.200 -0.012 -0.590 -0.018 -1.060 -0.005 -0.250 -0.010 -0.470Read product label -0.963 -1.480 -1.520 -1.790 * -0.688 -0.940 -0.770 -0.900 -0.604 -0.690Donating to charity 0.647 0.980 0.310 0.360 0.084 0.110 0.166 0.190 0.064 0.070Knowledge FT -1.914 -3.440 *** -1.774 -2.450 *** -2.403 -3.820 *** -2.984 -4.110 *** -2.854 -3.810 ***Knowledge regarding efficiency of FT 0.741 1.320 0.654 0.900 0.832 1.330 1.234 1.690 * 1.001 1.330Knowledge regarding objectives of FT 0.576 1.100 0.176 0.260 0.483 0.820 0.490 0.720 0.679 0.960Knowledge NGO (MfM) 1.252 2.110 ** 0.925 1.200 2.100 3.140 *** 2.127 2.750 *** 2.204 2.760 ***Knowledge regarding efficiency of NGO (MfM) -1.537 -2.620 *** -1.483 -1.950 * -2.047 -3.120 *** -2.463 -3.220 *** -2.044 -2.590 **Importance of organic -0.011 -0.040 0.250 0.670 0.303 0.950 0.184 0.490 0.317 0.820Importance of production w/o child labor 0.222 0.640 -0.022 -0.050 0.110 0.280 0.272 0.590 0.214 0.450Importance of high quality 1.154 2.660 *** 1.403 2.490 ** 1.249 2.560 ** 1.591 2.810 *** 1.233 2.110 **CRM is useful 0.068 0.200 0.026 0.060 0.380 1.000 0.022 0.050 0.446 0.970CRM is a marketing gag 0.260 1.360 0.335 1.350 0.261 1.230 0.372 1.500 0.220 0.860CRM can be used instead of donations -0.020 -1.140 -0.029 -1.290 -0.048 -2.510 ** -0.036 -1.590 -0.020 -0.870CRM can be used instead of FT purchases 0.015 0.720 0.015 0.540 0.050 2.100 ** 0.031 1.110 0.027 0.930Gender (female) -1.576 -1.810 * -1.181 -1.040 -2.215 -2.270 ** -2.006 -1.760 * -2.630 -2.240 **Vickrey mechanism 0.079 0.140 0.072 0.100 0.326 0.520 0.229 0.310 0.965 1.270Information about FT (in round 2) -0.297 -1.620 -0.294 -1.470 -0.387 -1.820 * -0.066 -0.230 0.018 0.090Constant -4.565 -1.260 -3.414 -0.720 -6.563 -1.600 -5.756 -1.210 -7.325 -1.500Sigma_u 1.055 1.421 1.181 1.307 1.477Sigma_e 0.733 0.798 0.817 1.139 0.808Rho 0.674 0.760 0.677 0.568 0.770R-sq within 0.078 0.065 0.096 0.002 0.000R-sq between 0.653 0.627 0.742 0.710 0.708R-sq overall 0.573 0.566 0.680 0.603 0.653Obs per group: min 2 2 1 2 2Obs per group: avg 2 2 1.9 2 2Obs per group: max 2 2 2 2 2No of obs 64 64 61 64 64No of groups 32 32 32 32 32 a *** p<0.01Wald chi-sq (18) 28.99 25.67 42.98 34.29 33.97 a ** p<0.05Prob > chi-sq 0.0485 0.1074 0.0008 0.0116 0.0127 a * p<0.1

15

5. WTP FOR FT, ORGANIC AND CRM REGARDING COFFEE MEASURED BY AUCTIONS VERSUS

CHOICE EXPERIMENTS

Consumers might donate to charity or buy FT products for various reasons. Therefore,

preferences are expected to vary across individuals. Without understanding the form and

extent of preference heterogeneity it will be difficult to make assumptions regarding the

relationship between donations, FT and CRM activities in combination with a product

purchase.

Against this background, we conducted a choice experiment with n=481 in Germany

in 2008 to investigate consumers’ preferences for differently labelled coffee. Main objective

was to measure the premiums consumers are willing to pay for sustainable and ethical coffee

production as well as for CRM activities comparable to FT.

During the coffee choice experiments participants were asked to make six choices.

Each choice set consisted of four coffee packages representing different attribute bundles

and various attribute levels. The experimental design included four coffee attributes with

different levels each. Namely, Price: 2.99 €, 3.99 €, 4.99 €, 5.99 €; Organic: no, yes; Label:

no label, FT, charity organization; Donation: no donation, 0.2 € or 0.5 € or 1 € directly to the

producer/farmer. It is to note that in this hypothetical choice experiment the brand as product

attribute was not included which is a clear difference to the above described auctions.

To analyze the data we applied a mixed logit model. This analytical approach

provides a flexible econometric method for economic discrete choice that is postulated to

come from utility maximization (e.g. MCFADDEN AND TRAIN 2000). The mixed logit has the

relevant advantage of allowing for taste heterogeneity unconditional on socio-economic

covariates (MENAPACE ET AL. 2008). The mixed logit model was estimated using the Gauss

code for panel data written by TRAIN4.

With regard to the empirical results, price was found to be significantly negative. All

other attributes show positive signs and are highly significant except for “NGO”. This leads to

the assumption that the sample of German consumers does not prefer donations over FT or

organic coffee and indicates that consumers do not value this CRM activity (see table 7).

4 Available at Train's webpage URL: http://elsa.berkeley.edu/~train/software.html.

16

Moreover, estimates reveal that German consumers prefer FT over organic

production (WTP 0.79 €/500g) or donations and are willing to pay a considerable premium

for FT coffee (WTP 1.32 €/500g). Also, the variance coefficient for FT is found to be highly

significant indicating that German consumers are heterogeneous in their preferences for FT

coffee.

To compare these results with our results from the experimental auction we

calculated the mean prices participants were willing to pay for the five different coffees. We

calculated prices without zero bids, which is a difference to the above estimation in table 4

and 5. Table 6 shows that participants were willing to pay between 2.29 € and 3.09 €.

Compared with average retail prices to be found in local grocery stores these prices are

significantly lower. However, looking at the maximum prices we can see that they are even

higher than the end consumer prices in the supermarkets.

Table 6: Coffee bids - statistical measures (calculated without zero bids)Coffee Coffee CRM Coffee organic Coffee FT Coffee organic and FT

N valid 58 57 47 55 54N missing 16 17 27 19 20Mean 2.29 2.81 2.73 3.09 3.08Std. dev. 1.251 1.472 1.492 1.782 1.730Minimum 0.30 0.60 0.50 0.80 0.80Maximum 5.00 6.00 6.00 8.00 7.00Retail prices (mean) of Jan.2009 in €

3.45 5.79 5.99 4.99 5.29

The comparison in table 7 leads to the conclusion that applying choice experiments

consumers show a WTP for the attribute organic of 0.79 € while they are only willing to pay

0.42 € more for organic coffee in the auctions compared to the regular coffee. With regard to

FT coffee they are willing to pay 1.32 € more applying choice experiments while the auction

results reveal a WTP of 0.80 € compared to regular coffee. CRM coffee labelled with the

NGO label MfM leads to an increase in WTP of 0.13 € applying experiments while the

auctions lead to an increase of 0.52 €. Overall, we can state that for organic and FT coffee

the choice experiments lead to higher WTP compared to the auctions. The opposite is to

state for CRM coffee, where we have higher WTP measured by auctions compared to choice

experiments. Nevertheless, comparing the WTP for whole coffee packs (from the auctions)

17

with market prices participants’ bids were significantly lower – which might be reasoned by

the fact that they were students (see table 7).

Table 7: Comparison of WTP measured by auctions and by choice experiments

Choice experiments Auctions

Coeff. Std. err. t-value WTP (marginal) Mean WTP

Price -0.852 0.023 -37.102 Regular coffee 2.29 €Organic (mean) 0.673 0.076 8.902 0.79 € Organic coffee 2.71 €(std.-dev.) 1.189 0.088 13.484 1.40 €FT (mean) 1.129 0.089 12.736 1.32 € FT coffee 3.09 €(std.-dev.) 1.348 0.092 14.595 1.58 €NGO (MfM) (mean) 0.113 0.082 1.381 0.13 € NGO (MfM) coffee 2.81€(std.-dev.) 0.871 0.106 8.187 1.02 €Donation 0.20 € (mean) 0.200 0.092 2.165 0.23 €(std.-dev.) 0.592 0.174 3.398 0.69 €Donation 0.50 € (mean) 0.870 0.080 10.902 1.02 € (std.-dev.) 0.338 0.176 1.917 0.40 €Donation 1.00 € (mean) 1.192 0.093 12.784 1.40 € (std.-dev.) 1.169 0.105 11.130 1.37 €NOT (mean) 8.103 0.680 11.913 9.51 €(std.-dev.) 4.184 0.436 9.597 4.91 €

6. CONCLUSION

This study investigates ethical consumers’ WTP for donations, FT, organic production and

CRM in the case of coffee. In this regard, we applied an experimental auction in a consumer

survey and used panel data analysis with random effects to analyze the data.

It becomes evident that consumers are willing to pay a premium for the additional

product features FT, organic and donations in form of CRM. Due to this WTP of a premium

for an altruistic concern, these consumers can be characterized as ethical consumers. We

show that FT has a higher reputation which leads to a higher WTP compared to the other

tested coffee features. Thus, we can state that at least some German student coffee drinkers

care about poverty of marginalised people in developing countries in daily purchase

decisions.

Regarding methodological issues our results show that there are only marginal

differences in applying either Vickrey auctions or applying the BDM mechanism.

Furthermore, we compared results for WTP measured by means of auctions and choice

experiments. Results indicated that for organic and FT coffee the choice experiments lead to

higher WTP compared to the auctions while the opposite is to state for CRM coffee.

18

Up to now and due to the sample of students we are not able to state anything about

socio-demographic factors influencing the WTP. However, we will repeat the auctions after

revising the experimental set up. We will use again laboratory auctions. We are aware that

the compensation we are paying the participants for attending the laboratory session may

have some influence on the bids (see e.g. LUSK AND FOX 2003). But for our purpose the

possibility to control for the surrounding influences is of great importance. Compared to the

pre-study we will improve the training and practice part of the auctions. We will include

several rounds of practice auction with a non-focal good. This is useful because in the real

setting a cross section of education levels and age groups instead of the homogenous group

of well informed students will bid on the coffee packages. Finally, we will be able to

determine ethical consumers’ WTP for either donations or coffee labelled as FT, organic and

CRM.

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