This paper considers a group of consumers who have preferences over how a good is produced and distributed, rather its traits alone. Moreover, it is hypothesized that ethical preferences also depend on prices, and that prices inform consumers about the way goods are produced and distributed. The concept of conspicuous ethics is introduced in order to motivate the consumption of ethically produced goods. The paper states the assumptions and conditions representing the consumption behavior of the ethical consumer. It is shown that a price-dependent direct utility function provides the necessary structure in the characterization of the consumption behavior of the ethical consumer.
In “The Theory of the Leisure Class”, Veblen [
• Preferences may depend on prices because of “snob appeal” [
• Preferences may depend on prices because people judge quality by its price [
• Price dependent preferences are also considered when individuals purchase financial assets, i.e., when money enters the utility [
The aim of the literature on price dependent preferences is to derive and examine the formulas for comparative statics analysis of demand functions. This requires to establish generalizations of the Slutsky equation, when normal or relative prices enter the utility of the consumer [
In this paper, however, we ask a fundamentally different question. In particular we investigate a class of individuals who exhibit rather unusual consumption behavior according to standard economic theory, the ethical consumers. We ask the following question: Are ethical consumers best characterized by price independent or dependent preferences? Hence, the aim of this paper is to show that there are further reasons for considering price dependent preferences beyond snob appeal, judging quality by its price, and money in the utility. The focus of discussion is on the theoretical development of a model of ethical consumption, a topic only marginally encountered in the literature.
A fast growing number of consumers base their daily consumption decisions on the basis of ethical values, such as human rights, environmentally friendly production, sustainable production and distribution standards, and animal well-being [
1) Ethical consumers do not only care about the physical properties of a good, but they also care how a good is produced and distributed.
2) Ethical consumers boycott the consumption of unethically produced and distributed goods. Hence consumer may exhibit negative consumption.
3) The demand for ethically produced and distributed goods is positively correlated with prices.
The literature on the theory of ethical consumption is sparse, suggesting that the characterization of the ethical consumer is a non-trivial open problem [
Our main result shows that it is necessary to characterize ethical consumers by price dependent direct utility functions. The necessity follows from a comparative analysis, showing a shift of the indifference curve given a change in the relative prices. The next section discusses the model of ethical consumption in some detail. The main result is discussed in the conclusion, which also suggests directions for future work.
Definition 1 Conspicuous ethics refers to an ethical consumption behavior where a consumer expresses superior ethical responsibility towards society by purchasing ethically produced and distributed goods. The ethical consumer also expresses superior ethical responsibility towards society by boycotting the consumption of unethically produced and distributed goods.
Let there be a group of socially responsible consumers represented by an index i = 1 , ⋯ , I satisfying definition 1. There are i = 1 , ⋯ , L ethically produced and distributed consumption goods. An ethical consumption bundle is denoted by x i ∈ X i , where ∈ X i ⊆ ℝ + + L . We consider the following price normalization q = ( q 1 , ⋯ , q n ) ∈ S ∪ S ¯ , where
S : = { q ∈ ℝ + + L : ∑ l = 1 n q l = 1 } ,
with its closure simplex defined by
S : = { q ∈ ℝ + L : ∑ l = 1 n q l = 1 } .
Preferences for goods may depend on prices because consumers judge quality by its price [
Assumption 1 For every i = 1 , ⋯ , I , an ethical preference is a pair consisting of a preference ordering over an ethically produced and distributed consumption bundle x i ∈ X i and a relative price system q = ( q 1 , ⋯ , q n ) ∈ S , where
s : S → S (1)
is a one-to-one map, disentangling the relative ethical consumption prices p ∈ S ⊂ ℝ + n into a price index q ∈ S which enters the direct utility of the consumer.
We introduce a parameterized price dependent utility function
u i : X i × S ¯ → ℝ (2)
which satisfies assumption 2.
Assumption 2 1) The parameterized utility function u i ( x i ; q ) is smooth on the domain X i × S , and continuous on the domain X i × S ¯ . 2) The parameterized utility function is smoothly increasing w.r.t. every x i l , D u i ( x i ; q ) > 0 for every q ∈ S ¯ . 3) The parameterized utility function is smoothly quasi concave. The restriction of the quadratic form D 2 u i ( x i ; q ) to the tangent hyperplane at x i * ∈ X i to the hypersurface { x i ∈ X i : u i ( x i ; q ) = u i ( x i * ; q ) } is negative definite for every q ∈ S ¯ and x i * ∈ X i . 4) For any u i * there exists some x i * ∈ X i such that the hypersurface { x i ∈ X i : u i ( x i ; q ) = u i * } is bounded from below for every q ∈ S ¯ . 5) The parameterized utility function is smoothly increasing w.r.t. every q i l , D u i ( x i ; q ) ≥ 0 for every q ∈ S ¯ with strict equality for at least one q i l (
Let an ethical consumer i = 1 , ⋯ , m be endowed with a vector of initial endowments ω i = ( ω i 1 , ⋯ , ω i n ) ∈ Ω i ⊂ ℝ + + , and let his set of feasible consumption allocations be defined by
B ( p , ω i ) : = { ( p , x i ) ∈ S × ℝ + n : p ⋅ x i ≤ p ⋅ ω i } .
Let assumptions 1 and 2 hold. Then for any given ethical price system3 p ∈ S the objective of the consumer is formalized as
arg max u i ( x i ; s ( p ) ) x i ∈ B ( p , ω i ) (3)
Theorem 3 An ethical consumer is characterized by a price dependent direct utility function if there is a constant 0 < K ( Δ ϵ i ) < 2 such that
ε = q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k > 0. (4)
Proof. By the Fechner and Weber theorem [
Δ ϵ i = ln ( σ i + Δ σ i ) − ln ( σ i ) (5)
σ i : = q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k
Δ σ i : = q k M R S ( s ( p ) ) j ∂ M R S ( s ( p ) ) j ∂ p k − q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k
From Equation (5), we obtain by substitution
Δ ϵ i = ln ( q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k + q k M R S ( s ( p ) ) j ∂ M R S ( s ( p ) ) j ∂ p k − q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k ) − ln ( q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k )
Δ ϵ i = ln ( ( q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k + q k M R S ( s ( p ) ) j ∂ M R S ( s ( p ) ) j ∂ p k − q k M R S ( s ( p ) ) j ∂ M R S ( s ( p ) ) l ∂ p k ) ( q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k ) ) (6)
which yields
e Δ ϵ i = e ln ( p k M R S ( s ( p ) ) j ∂ M R S ( s ( p ) ) j ∂ p k p k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k ) = : K ( Δ ϵ i ) (7)
From Equations (6) and (7) we obtain
K ( Δ ϵ i ) = ( q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k + q k M R S ( s ( p ) ) j ∂ M R S ( s ( p ) ) j ∂ p k − q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k ) q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k
K ( Δ ϵ i ) q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k = q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k + q k M R S ( s ( p ) ) j ∂ M R S ( s ( p ) ) j ∂ p k − q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k
K ( Δ ϵ i ) q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k − q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k = q k M R S ( s ( p ) ) j ∂ M R S ( s ( p ) ) j ∂ p k − q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k
q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k ( K ( Δ ϵ i ) − 1 ) = q k M R S ( s ( p ) ) j ∂ M R S ( s ( p ) ) j ∂ p k − q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k
Define a new constant K : = K ( Δ ϵ i ) − 1 = e Δ ϵ i − 1 , which by substitution and little algebraic manipulation yields
q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k = q k M R S ( s ( p ) ) j ∂ M R S ( s ( p ) ) j ∂ p k − q k M R S ( s ( p ) ) l ∂ M R S ( s ( p ) ) l ∂ p k K > 0
The right hand side contracts if 0 < K < 1 , hence e Δ ϵ i − 1 < 1 from which the condition of the theorem follows.
The paper considers conspicuous ethics as the main driver of ethical consumption. It is assumed that ethical consumers have preferences over the way goods are produced and distributed. This is at variance to the standard economic model, which assumes a preference ordering over the traits of goods. Moreover, in order to reflect the empirically observed positive relationship between prices and demand for ethically produced goods, it is hypothesized that preferences also depend on prices. This is similar to the literature on product quality [
This paper provides a new framework for modelling ethical consumption. Moreover, the formula stated in the main theorem is empirically verifiable. The hypothesis to reject is ε ≤ 0 , which suggests that ethical preferences do not depend on prices ε = 0 or satisfy the usual law of demand ε < 0 .
Retailers can use this formula to classify ethical consumption goods. The paper suggests a product segmentation and price strategy for retailers using social labels, which provide a price signal and information set about how goods are produced and distributed to a group of informing consumers whose willingness to pay is high.
The authors declare no conflicts of interest regarding the publication of this paper.
Stiefenhofer, P. (2019) Conspicuous Ethical Consumption. Theoretical Economics Letters, 9, 1-8. https://doi.org/10.4236/tel.2019.91001