The ask being made of consumers is extremely modest: buy the same stuff you would otherwise buy at the same price, but through a specified company.
But is it possible that the company that donates its profits/revenue could indeed provide an equal product at the same price? And if not, is the price differential less or more than the donation being made? (And if it’s more, why not just pay less and donate the difference? However, either is theoretically possible.)
I think the basic microeconomic issues are
Are the firms in question earning ‘supernormal profits’ or rents as a function of their market power?
If so, what enables this and why don’t more firms already enter and compete this down to zero? Would the firm that ‘leverages consumer altruism’ have an advantage here?
If the firms are simply earning ‘normal profits’ (return on capital in line with the level of market risk) then how can the firm be giving any money to good causes without taking a loss? Or is there some synergy between the donations and production that yields a certain type of greater efficiency?
In recent years[1] there has been a surge in popularity of Fair Trade products as conscientious consumers have become more willing to pay higher prices to retailers who treat their producers and suppliers well. This has lead to a variety of research into Fair Trade products with arguments both supporting and disagreeing with Fair Trade. In this paper I consider the purchase of Fair Trade products to include both the product and a charitable donation. We make a case that “bundling” these can be efficient, implying that it may be less expensive to buy a Fair Trade products then to purchase an equivalent a non-Fair Trade product and make a separate donation. This occurs because when the farmer is given a higher income, he can be induced to put more effort into producing the product. Our preliminary work using data from Amazon.com supports this view, finding that fair trade coffees are no more expensive.[2]
Note that our argument in that paper basically could only work if the ‘donation’ in question is going to someone asked to put in effort on the part of the production process under incomplete information. So it may not apply to most of your ‘guided consumption’ cases. (But our case is only one of several.)
Note: I never published the empirical part of this work, and I’m not sure if others have followed up on the question of ‘relative price differentials’ paid by consumer vs intermediary.
And in case it’s interesting, here is a slide presentation of a talk on this paper I gave (a long time ago), which includes some of the empirical analysis at the bottom (which was dropped from the published paper).
You’re making the same mistake in understanding my proposition that a lot of my economics professors made that I am discussing charitable “bundling” (although after discussing with my professor from U of C, he understood better than what I was proposing). I must not be writing clearly.
Just instead of thinking of “donations” think dividends. Charities are simply occupying the same place that shareholders normally occupy. Thus, there is no reason it would be “taking a loss” any more than any other firm that has owners. The identity of an owner does not necessarily imply higher costs. Just as individuals trade ownership positions every day on the stock market, ownership could go to charities without jeopardizing performance.
I didn’t really misunderstand your proposal, but I am sort of thinking “at the margin, why would a rational altruistic consumer buy from these firms.”
So basically you are saying
Charities/philanthropists should invest in companies and tell people they are doing this, and tell people what share of profits is going to the charity.
OK they already do invest in companies, but they should tend to invest in those companies that are altruistic-consumer-facing, perhaps.
People will be motivated to shop at these companies rather than at other companies
This seems kind of obviously true and reasonable, and to some extent it already happens (Bill Gates and Microsoft etc.) But maybe it should happen more and be publicized more. So maybe I mainly agree with you on this, and it seems like a good initiative.
But I think the ‘at the margin’ questions still should be considered.
From the POV of the rational altruistic consumer, it must be the case that by buying a product specifically from the GC firm, this leads more money to go to the charity in net[1].
Going back to the idealized models of microeconomics
With ‘perfect competition’ or ‘monopolistic competition’, firms are meant to enter (and introduce new products) until no ‘super-normal’ profits are left. In such worlds I am not sure if a consumer preferring to buy from a GC company actually leads that company to make more profit. At least in perfect competition, firms set their price at marginal cost, and entry occurs until all firms are pricing at their average cost, and thus making no profits. Nor, with average cost pricing, are they making any incremental profits from additional purchases.
Our “Fair Trade paper” basically makes the point that even if firms are pricing at cost, a firm that pays its workers/suppliers more could, under some conditions, charge less than this markup to consumers, making it rational for altruistic consumers to buy from it. That’s the ‘synergy’ we talk about.
Of course the real world does not involve perfect competition … and the condition above is basically ‘only once we reach equilibrium’. But I think these issues still need to be considered. Suppose we are in a world where firms sequentially rival for monopoly. Or maybe there is only room for 1 firm in a particular industry. How is it that a firm that donates from its profits to charity could dominate such an environment. (I think you make some good points in this direction, as does Paul Pecorino. I just think these points should be addressed, it’s not a complete “no-brainer”.
You say:
But is it possible that the company that donates its profits/revenue could indeed provide an equal product at the same price? And if not, is the price differential less or more than the donation being made? (And if it’s more, why not just pay less and donate the difference? However, either is theoretically possible.)
I think the basic microeconomic issues are
Are the firms in question earning ‘supernormal profits’ or rents as a function of their market power? If so, what enables this and why don’t more firms already enter and compete this down to zero? Would the firm that ‘leverages consumer altruism’ have an advantage here?
If the firms are simply earning ‘normal profits’ (return on capital in line with the level of market risk) then how can the firm be giving any money to good causes without taking a loss? Or is there some synergy between the donations and production that yields a certain type of greater efficiency?
I believe the work of Paul Pecorino on ‘byproduct firm’, e.g., Monopolistic Competition and Public Good Provision with By‐Product Firms makes an (formal microeconomic theory) case for #1, at least indirectly.
My paper with Joon Song ‘Efficient Consumer Altruism and Fair Trade’ made an (formal microeconomic theory) case for #2. Below, a “layman’s explanation” of our work: from my old web page
Note that our argument in that paper basically could only work if the ‘donation’ in question is going to someone asked to put in effort on the part of the production process under incomplete information. So it may not apply to most of your ‘guided consumption’ cases. (But our case is only one of several.)
note this was 2012
Note: I never published the empirical part of this work, and I’m not sure if others have followed up on the question of ‘relative price differentials’ paid by consumer vs intermediary.
And in case it’s interesting, here is a slide presentation of a talk on this paper I gave (a long time ago), which includes some of the empirical analysis at the bottom (which was dropped from the published paper).
You’re making the same mistake in understanding my proposition that a lot of my economics professors made that I am discussing charitable “bundling” (although after discussing with my professor from U of C, he understood better than what I was proposing). I must not be writing clearly.
Just instead of thinking of “donations” think dividends. Charities are simply occupying the same place that shareholders normally occupy. Thus, there is no reason it would be “taking a loss” any more than any other firm that has owners. The identity of an owner does not necessarily imply higher costs. Just as individuals trade ownership positions every day on the stock market, ownership could go to charities without jeopardizing performance.
I didn’t really misunderstand your proposal, but I am sort of thinking “at the margin, why would a rational altruistic consumer buy from these firms.”
So basically you are saying
Charities/philanthropists should invest in companies and tell people they are doing this, and tell people what share of profits is going to the charity.
OK they already do invest in companies, but they should tend to invest in those companies that are altruistic-consumer-facing, perhaps.
People will be motivated to shop at these companies rather than at other companies
This seems kind of obviously true and reasonable, and to some extent it already happens (Bill Gates and Microsoft etc.) But maybe it should happen more and be publicized more. So maybe I mainly agree with you on this, and it seems like a good initiative.
But I think the ‘at the margin’ questions still should be considered.
From the POV of the rational altruistic consumer, it must be the case that by buying a product specifically from the GC firm, this leads more money to go to the charity in net[1].
Going back to the idealized models of microeconomics With ‘perfect competition’ or ‘monopolistic competition’, firms are meant to enter (and introduce new products) until no ‘super-normal’ profits are left. In such worlds I am not sure if a consumer preferring to buy from a GC company actually leads that company to make more profit. At least in perfect competition, firms set their price at marginal cost, and entry occurs until all firms are pricing at their average cost, and thus making no profits. Nor, with average cost pricing, are they making any incremental profits from additional purchases.
Our “Fair Trade paper” basically makes the point that even if firms are pricing at cost, a firm that pays its workers/suppliers more could, under some conditions, charge less than this markup to consumers, making it rational for altruistic consumers to buy from it. That’s the ‘synergy’ we talk about.
Of course the real world does not involve perfect competition … and the condition above is basically ‘only once we reach equilibrium’. But I think these issues still need to be considered. Suppose we are in a world where firms sequentially rival for monopoly. Or maybe there is only room for 1 firm in a particular industry. How is it that a firm that donates from its profits to charity could dominate such an environment. (I think you make some good points in this direction, as does Paul Pecorino. I just think these points should be addressed, it’s not a complete “no-brainer”.
I say ‘in net’ because, in case the equivalent product is more expensive at the GC firm, the amount going to the charity must exceed such a difference