Justifying the use of sweatshops:
The effect of an economic justification on willingness to pay
University of Amsterdam Faculty Economics & Business
Master Thesis MSc Business Administration, Marketing Track
MSc Thesis
Date: 29 June 2015 Final Version
Author: Marincke Gerbranda (10874259) Hemonystraat 52-3
1074 BS Amsterdam marinckegerbranda@gmail.com
+31 (0) 6 – 55 70 65 06
1st
Statement of Originality
This document is written by Student Marincke Gerbranda who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
ACKNOLEDGEMENTS
I would especially express my gratitude to my thesis supervisor, Anouar El Haij. You have kept me motivated throughout the process, through your positivism, enthusiasm, and fast
feedback. I enjoyed being your student throughout my Masters year.
Furthermore, I want to thank my family and friends who supported me in all the ways possible, in the good and the bad. In particular I want to thank my parents, for all the faith
Table of Content
ABSTRACT ... 5 1. INTRODUCTION ... 6 Research Question ... 8 Outline/Structure ... 8 2. LITERATURE REVIEW ... 92.1 Globalization, outsourcing and sweatshops ... 9
2.2 Socially conscious consumer ... 10
2.3 Corporate social responsibility ... 11
2.4 Transparency ... 11
2.5 Economic justification ... 12
Literature gap ... 13
3. CONCEPTUAL FRAMEWORK ... 15
3.1 Conceptual model ... 15
3.1.1 Information disclosure wages factory workers. ... 15
3.1.2 Income comparison related to inequality aversion ... 15
3.1.3 Economic justification ... 16
4. METHODOLOGY ... 18
4.1 Method ... 18
4.2 Research Design ... 19
4.2.1 Treatment A: True Price Original ... 20
4.2.2 Treatment B: Baseline ... 20
4.2.3 Treatment C: Wages Chinese factory workers x Dutch average income ... 20
4.2.4 Treatment D: Wages Chinese factory workers x economic justification ... 21
4.2.5 Treatment E: Wages Chinese factory workers x Dutch average income x economic justification ... 21 4.3 Sample Frame ... 22 4.4 Product Information ... 22 4.5 Variables ... 22 4.5.1 Dependent Variable ... 22 4.5.2 Independent variables ... 23 4.5.3 Control variables ... 23 4.6 Data Collection ... 23 4.7 Experiment Procedure ... 23 4.8 Data Analysis ... 24 4.8.1 Groups ... 24 4.8.2 Analytical Strategy ... 24 5 RESULTS ... 25 5.1 Descriptive Statistics ... 25 5.2 Hypothesis testing ... 27
5.2.2 Income comparison related to inequality aversion ... 27
5.2.3 Economic justification ... 28
5.2.4 Research Question ... 28
5.3 Multiple Regression Analysis ... 28
6. DISCUSSION ... 30
6.1 Theoretical implications ... 30
6.2 Managerial Implications ... 32
6.3 Limitations and implications for future research ... 32
7. REFERENCES ... 34
8. APPENDIX Appendix 1: Average income China, 2014 ... 40
Appendix 2: Average income China, 2014 ... 40
Appendix 3: Average income The Netherlands, 2014 ... 41
Appendix 4: Treatment A: True Price Original ... 41
Appendix 5: Treatment B: Baseline ... 42
Appendix 6: Treatment C: Wages factory workers x Dutch average income ... 42
Appendix 7: Treatment D: Wages factory workers x economic justification ... 43
Appendix 8: Questionnaire after bidding ... 43
Appendix 9: Questionnaire after bidding: Translation ... 43
Appendix 10: Experiment procedure ... 44
Appendix 11: Means per treatment of Total Sample ... 44
Appendix 12: Contrast coefficients ... 45
Appendix 13: One-way ANOVA - Contrast test - Upper 50% ... 45
ABSTRACT
During the last decade, negative awareness concerning sweatshops has risen (Chan & Peng, 2011; Chin, 2014). This study aims to measure the effect of economic justification for the low wages of Chinese factory workers on the consumers’ willingness to pay. An online experimental auction with 511 participants was used to estimate the effect on the willingness to pay through five different treatments. Contrary to previous research, the results indicate that consumers’ willingness to pay decreases when information concerning the low wages of factory workers in China is provided. Becchetti and Rosati (2007) assume that ethical consumption is motivated by a general aversion to inequality, between rich consumers and poor workers as theorized by Fehr and Schmidt (1999). It was found that providing information regarding income inequality negatively affects the consumers’ willingness to pay for the group bidding in the 50-75 percentile. Based on the research, the more people claim to be aware of income inequalities, the stronger the willingness to pay decreased. Furthermore, the research finds that the willingness to pay increases when disclosing information concerning economic justification.
Keywords: Globalization, Outsourcing, Sweatshops, Socially Conscious Consumer, Transparency, Economic Justification, and Income Inequality
1. INTRODUCTION
Nowadays, consumers are ever more aware of where the products they purchase are manufactured and under which circumstances. Several serious incidents in sweatshops, e.g. Bangladesh and China, came in the news and raised awareness with mainly negative effects (Chan & Peng, 2011; Chin, 2014). In January 2015, the managers of the Norwegian paper ‘Aftenposten’ decided to publish a story titled ‘Sweatshop, deadly fashion’ (APTV, 2014). The newspaper sent three Norwegian fashion bloggers to Phnom Phen, Cambodia. The bloggers experienced the working conditions of local garment workers for a month. They worked, lived and got paid like the garment workers in Cambodia. The bloggers’ experiences were ‘shocking’ and also very confrontational, especially when they compared sweatshop wages to their home situation in Norway. Sweatshops are places of employment that offer low pay, poor working conditions and long hours (Powell & Skarbek, 2006). All the negative media attention about sweatshops can have a negative effect on business, mainly for leading multinational corporations in the retail industry.
Several leading fashion companies are closely linked to so-called sweatshops (Bartley & Child, 2014). For example, Nike has been accused of bad labor conditions, such as excessive working hours, high-pressure work environments and not offering enough pay. Because of the accusation, Nike received negative media attention, which damaged the company’s reputation and had a considerable negative effect on Nike’s sales (Wilsey & Lichtig, 2000). Apple has experienced similar accusations in the past, which have affected its sales too (Forst & Burnett, 2007). The same is true for several other multinational companies such as Gap and H&M (Wong, 2013).
Increased awareness about bad labor conditions in the sweatshops of leading multinationals has incited the instigation of a two-sided discussion between activists and economists (Langella et al., 2012; Kennel, 1996). The activists argue that garment workers are treated unethically due to low pay and bad working conditions (McCafferty, 2005; Powel & Skarbek, 2006). According to the activists, these bad conditions could be solved by paying workers a wage that allows them to save money, take care of their families and move up to their society’s middle class (Wazir, 2001). On the other hand, economists provide consequence-based financial reasons in favor of using sweatshop labor. It may be that
sweatshops are economically justified, even if consumers perceive that the conditions of sweatshop labor are unfair (Paharia et al., 2013). Krugman (1997) and Powell & Zwolinski (2012) explained why garment workers are often so eager to accept sweatshop jobs: Relative to their other alternatives, sweatshop labor is an attractive option for workers in the developing world. While multinationals benefit from globalization, the biggest beneficiaries are third-world workers. An income of $3.50 a day, the base pay of Nike factory workers in Indonesia, might sound like substandard compensation. However, half of all adults in Indonesia are farmers and receive less than $1 a day. Therefore, the factory workers consider themselves fortunate to be earning minimum wage (Kennel, 1996; Sicat, 2013). For this reason, economists support most sweatshop jobs because these provide their workers an above-average standard of living compared to their alternatives and domestic competitors (Powel & Skarbek, 2006).
Most people are likely to say that they care about fair labor standards in factories, including wages. Although they seem to care, such sentiments do not always motivate them to change their actual shopping behaviors and decisions about how they spend their own money, thus identifying an intention-behavior gap. So-called ethical consumerism is a burgeoning movement, yet ethically minded consumers rarely purchase ethically (Carrington et al., 2014). Hainmueller and Hiscox (2012) identified a segment of shoppers willing to support fair labor standards by voting with their shopping dollar. In an experiment in an outlet store, labels with information about fair labor standards had a substantially positive effect on sales. Individuals shopping in outlet malls are likely to have the explicit goal of saving money by finding bargains. It is therefore plausible that they will not pay much attention to any messages that are not associated with that one goal. Shoppers in other retail contexts who may be less focused on price will probably be more attentive to other product characteristics than outlet shoppers.
This thesis studies the effect of disclosing economic justifications on the consumers’ willingness to pay, testing whether the intention-behavior gap also applies to this subject matter. This applies to products sold in an online auction and showed consumers’ actual willingness to pay. The following research question will be answered.
Research Question
To what extent does an economic justification of sweatshops affect consumers’ willingness to pay?
Outline/Structure
This research paper is divided into six different sections. The following chapter introduces the existing literature. The research gap that evokes the research question will be defined. Secondly, the conceptual model regarding the experiment will be presented, as will be the hypotheses. Next, the methodology will be described in detail. This description will be followed by the results of the research. The research question will be answered by empirical research using demand-eliciting auctions. The last section includes the discussion, limitations, implications and recommendations for future research.
2. LITERATURE REVIEW
In this chapter, the existing literature regarding the research question is closely reviewed to provide deeper insight into the research topics. The most relevant topics in this thesis are examined. Firstly, the literature concerning globalization, outsourcing and sweatshops is closely studied, followed by the literature concerning the socially conscious consumer. Secondly, transparency is discussed, and in the end, a deeper insight of economic justification is provided.
2.1 Globalization, outsourcing and sweatshops
As retailers have found themselves faced with intensifying global competition in both domestic and overseas markets, outsourcing has emerged (Adams, 2002). Outsourcing is defined as the form of trade in intermediate inputs (Katz & Murphy, 1991; Feenstra & Hanson, 1996) and is used because of increased pressure throughout the supply chain to cut costs (Adams, 2002). Because of increasing earnings inequality, international outsourcing was introduced (Miller 2001), but there are also other reasons for outsourcing. Firstly, outsourcing allows a company to take advantage of lower wage rates and other operating costs (Prendergast et al. 2010; Monczka & Trent, 1991). Also, it helps lower the cost of ownership, reduce inventories and maintain good quality (Backeling & Welchermill, 2013). Consequently, outsourcing links thousands of firms across cultural and political boundaries.
Many products are manufactured and assembled in third-world countries and sold on the global market. Although this has made good business sense, the outsourcing of production to the developing world has resulted in criticism from civil society organizations about workplace standards in plants called sweatshops (Frost & Burnett, 2007). Particularly China has suffered from the “suicide express” at the Foxconn factory complex located in Zhengzhou, which is a major supplier to Apple, Dell and Hewlett-Packer (Guo et al., 2012; Litzinger, 2013). Workers in those sweatshops are often subjected to rights violations and a level of victimization (Levi et al., 2011). Next to all the benefits of international outsourcing, there is also a major disadvantage deriving from outsourcing and producing in third-world countries.
Sweatshops are factories in third-world countries that are generally characterized as places of employment that offer low pay, poor working conditions and long hours (Powell & Starbek, 2004). This type of factory is mostly found in the apparel, sports shoe and toy industries (Frost & Burnett, 2007). The factories are mostly owned or used by multinational manufacturers such as Nike, the Gap and H&M (Wong, 2013). Many of these manufacturers have their headquarters and customer bases in the United States (Wong, 2013), while their production processes are carried out in developing countries such as Vietnam, China, Honduras, Brazil and Cambodia. All of these manufacturers and many more have been linked to sweatshops and thus to harsh garment production practices, including child labor and wages that are below legislated standards (Wong, 2013; Kennel, 1996). This is an important issue for companies since it has a great negative effect on sales (Wazir, 2001), as discussed in the introduction. Thus, companies are also confronted with risks of outsourcing parts of the production process to the developing world.
2.2 Socially conscious consumer
Due to increased media attention (Wazir, 2001), consumers have started to care about labor practices and have become increasingly conscious of the bad labor conditions provided for garment workers (Hainmueller & Hiscox, 2012). Additionally, consumers do not favor the use of sweatshop labor and may view its use as unethical (Pollin et al., 2004; Paharia et al., 2013). This has resulted in the rise of the socially conscious consumer (Mohr et al., 2001; Kay, 2014) who takes the public consequences of his or her private consumption into account and tries to use his or her purchasing power to bring about social change (Webster, 1975). These consumers try to minimize and eliminate any harmful personal effects and maximize the long-run beneficial impact on society (Mohr et al., 2001). They are in general willing to pay premium prices for ethically produced products (Mori, 2000; De Pelsmacker et al., 2005). Thus, consumers would argue that they care about sweatshop labor and are willing to pay for products that are free of it (Ehrich & Irwin, 2005; Hainmueller et al., 2011; Luchs et al., 2010; Vogel, 2007). However, it is remarkable that there is continued demand for unethically produced products.
Hainmueller and Hiscox (2012) found in their experiment that consumers care about whether the products they buy are made in workplaces with fair labor standards. In general, these consumers also express concerns about tolerating unsafe and unfair sweatshop conditions in global supply chains (Hainmueller & Hiscox, 2012). However, it is difficult to solve this
debate by analyzing consumers’ answers to survey questions about hypothetical situations and choices (Carrington et al., 2014). Most consumers are likely to say that they care about fair labor standards in factories even if such considerations would not motivate them to modify their actual shopping behaviors (Carrington et al., 2014). Thus, although there is considerable buzz around the concept of ethical consumption, the reality of actual ethical consumption behavior differs at the checkout counter, where consumers forget to support their beliefs (Auger & Devinney, 2007; Eckhardt et al., 2010; Carrington et al., 2014).
2.3 Corporate social responsibility
Corporate social responsibility (CSR) is defined as the improvement of the quality of life by committing to contribute to sustainable economic development by working with employees, their families, the local community and society at large (Council for Sustainable Development, 1999). CSR is an essential part of public policies for the private sector within the framework of international development cooperation (Ministry of Foreign Affairs, the Netherlands, 2013; Auger et al., 2003). This resulted in an increased demand by consumers (Levi et al., 2011), as discussed before, the socially conscious consumer.
2.4 Transparency
Together with globalization, CSR and the socially conscious customer comes transparency. According to Cicala et al. (2014), transparency is the notion of accuracy, truth and the full disclosure of relevant information (Murphy et al., 2007). In business, information must be clearly communicated towards all involved parties in the supply chain, including agents, contractors, union representatives and production workers (Emmehainz & Adams, 1999). Since corporate social responsible behavior is based on being fair, respectful and honest, companies that live up to these values are perceived by society as more credible (Öberseder et al., 2013). For consumers, transparency is the possibility of accessing information, intentions or behaviors (Turilli & Floridi, 2009). They are willing to pay a higher price under a higher level of transparency, since lower transparency is modeled by higher uncertainty about the compensation a worker receives for making a product (Kraft et al. 2014).
Kraft et al. (2014) found that high pro-social consumer’ judgments are mainly determined by the social outcome, which may be raising the wages of factory workers rather than providing information concerning the firms’ effort, such as good labor conditions. They also found that valuations of low pro-social consumers are positively affected when transparency is high. On
the other hand, as transparency decreases, pro-social consumers’ valuations will be negatively influenced through their declining willingness to pay. Thus, companies may benefit from transparency and have to improve their communication concerning their social responsibility practices (Kraft et al., 2014).
2.5 Economic justification
Central in this thesis is the effect of the transparent information disclosure of economic justification. A justification is ‘an account that takes responsibility for the unethical act and attempts to make it seem ethical; whereas an excuse denies full responsibility for the action’ (Eckhardt et al., 2010). International trade is perceived as an important justification for an increase in the wage gap between developed and developing countries (Feenstra & Hanson, 2001). Economic justification will therefore adhere to the definition of Paharia et al. (2013): ‘providing consequence-based financial reasons in favor of using sweatshop labor’.
There is a popular two-sided discussion concerning sweatshops. On the one hand the socially conscious consumer votes against sweatshops. On the other hand economic reasoning can be used to justify these sweatshops. Even if sweatshops workers are treated unfairly there are several points to be made in defense of sweatshops (Powell & Zwolinski, 2012). Most scholarly work researching sweatshops has focused on wages of employees (Powell & Skarbek, 2006). Therefore, this study focuses on the economic justification of wages of sweatshop workers. The most basic point made by defenders of sweatshops is that workers voluntarily chose to work there and thus accept sweatshop employment. This demonstrates that sweatshops are the best alternative available to them (Powell & Zwolinski, 2012). Therefore, Powell and Zwolinski (2012) argued that activists should not support rules that could jeopardize these jobs.
Other commonly cited economic arguments in support of using sweatshop labor include those concerning improvement of short-term employment and long-term economic development (Krugman, 1997; Powel & Skarbek, 2006). These justifications are referred to frequently in public debates and are therefore accessible to and used by consumers when they are considering purchasing sweatshop-made products (Eckhardt et al., 2010). One can say, “I am firmly against sweatshops. No one–child or adult–should have to work in sub-human conditions” (Kennel, 1996). Stating that working at a sweatshop means the difference between having food to eat each day, opposed to not knowing where one’s next meal is
coming from (Kennel, 1996). Most sweatshops owned by multinational firms provide their workers an above-average standard of living compared to local firms (Powel & Skarbek, 2006), and therefore, workers in sweatshops are far better off than most people in their region. Wong (2013) suggest that sweatshops are needed to facilitate economic progress.
Wages and working conditions in third-world countries are remarkably low compared to western industrialized nations’ standards. However, relative to standards in underdeveloped countries like Guatemala and Cambodia, wages and working conditions are often clearly above national standards (Adams, 2002). It has been proven that sweatshops directed by multinational firms often pay three to seven times the wages paid elsewhere in the economy (Powell & Skarbek, 2004; Aitken et al., 1996; Lipsey & Sjoholm, 2004; Powell & Zwolinski, 2012). Eliminating these sweatshops may therefore hinder or slow the rate of the economic development of these countries (Adams, 2002), since outsourcing and sweatshops improve workers’ lives by increasing the supply of capital (Feenstra & Hanson, 1996). Therefore, Powell and Zwolinski (2012) came up with idea to solving the problem of global poverty through sweatshops instead of doing nothing at all.
Nowadays, all sides of the debate recognize that sweatshop labor often represents the best option for desperately poor workers to improve their lives and the lives of their families (Powell & Zwolinski, 2012). The alternative to working in a sweatshop is often chronic unemployment (Adams, 2002).
It is expected that participants who endorse economic justifications would report stronger intentions to buy a sweatshop-made product than the socially conscious customer (Paharia et al., 2013). Additionally, Becchetti and Rosati (2007) assume that ethical consumption is motivated by a general aversion to inequality, as theorized by Fehr and Schmidt (1999), between rich consumers and poor country workers.
Literature gap
The discussed literature gives insight into globalization, outsourcing, the rise of CSR and the socially conscious customer, transparency and economic justification, which all have frequently been studied separately. However, there has not been any research on how information disclosure of economic justification actually influences consumers’ willingness to pay for a product. Consumers may act very differently once the right sort of information is
provided (Auger et al., 2003). For now, considerable research has been done concerning sweatshops, their economic justification and transparency. However, it is still unknown whether the transparency of economic justification of the low wages provided in sweatshops, in reality leads to the increase of consumers’ willingness to pay. Or will it decrease the esteem of the product, expressed in a reduction of the consumers’ willingness to pay? To answer these questions, this thesis will fill this literature gap by answering the following research question
To what extent does an economic justification of sweatshops affect consumers’ willingness to pay?
3. CONCEPTUAL FRAMEWORK
In this section, the hypotheses are carefully explained and closely clarified.
3.1 Conceptual model
3.1.1 Information disclosure wages factory workers.
Auger et al. (2003) states that consumers tend to have a fairly rational view of ethical issues during the decision-making process of a purchase. When consumers consider purchasing a product, they are not only concerned with what retailers sell and at what prices, but also with the conditions under which the merchandise was produced and made available for sale (Adams, 2002). Questioned labor practice is one of these concerns, meaning that consumers mainly notice the low wages paid to factory workers (Powell & Starbek, 2004).
Additionally, consumers are willing to pay a higher price under a higher level of transparency (Kraft et al., 2014). They also state that they care about sweatshop labor and prefer products made without it (Paharia et al., 2013). Thus, transparency concerning factory workers’ wages may positively influence consumers’ willingness to pay. Therefore, hypothesis 1 is stated as follows.
Hypothesis 1: Disclosing information concerning the daily income of a Chinese factory worker will positively influence consumers’ willingness to pay.
3.1.2 Income comparison related to inequality aversion
The theory of inequality states that individuals compare their payoffs with those of others and prefer payoff inequality (Fehr & Schmidt, 1999; Bolton & Ockenfels, 2000). Implying, their social preferences are primarily driven by aversion to inequality rather than by a motivation to increase social welfare (Bazerman et al., 1995; Fehr & Schmidt, 1999; Tricomi et al., 2010). Becchetti and Rosati (2005) argued that ethical consumption is motivated by a general aversion to inequality, especially the inequality between rich consumers and third-world country workers. Pro-social behavior is understood broadly to refer to individuals’ actions intended to benefit one or more other individuals or groups (Shipley, 2008).
Sung (2007) finds that China’s export is mainly driven by low value-added processing export of foreign multinationals. Therefore, China is often seen as a world sweatshop rather than a global manufacturing center (Sung, 2007). Furthermore, China is known for its limited workers’ rights and undermining their wellbeing (Chan & Peng, 2011).
Reflecting this to the research, China is used as a reference for sweatshop labor. As explained in the introduction, sweatshop labor is defined by Powell & Skarbek (2006) as employment that offers low pay, poor working conditions and long hours. Since China is known for its limited workers’ rights and undermining wellbeing (Chan & Peng, 2011), this study uses China as an indicator for the comparative study.
The comparison study also used the Dutch daily average income. Since the Dutch daily average income (€62.74) is almost seven times as high as the Chinese average factory wages (€9.25), it is perceived as an income inequality. Furthermore, the participants of Veylinx reflect the Dutch society, since 100% of the test group had the Dutch nationality. Therefore, this study is able to measure the willingness to pay of the Dutch society. The second hypothesis states as follows.
Hypothesis 2: Providing information concerning the daily wages of the factory workers in comparison with the Dutch daily average income, negatively affects the consumers’ willingness to pay. This is compared to providing only information concerning wages of the factory workers whether or not with an economic justification.
3.1.3 Economic justification
Information disclosure may impact consumers’ attitudes and purchase intentions (Yan et al., 2010). However, how consumers act upon the information that is provided is not consistent (Auger et al., 2003). Some consumers are not affected at all by certain information. They try to avoid information about sweatshop labor altogether. Others may have no choice but to consider it (Paharia et al., 2013). Thus, it is still unknown what information about ethical features provokes the purchase decision process (Kraft et al., 2014; Auger et al., 2003). One reason may be that consumers do not understand the ethical dimensions of the products that they purchase (Auger et al., 2003). Another may be that consumers who choose to deliberate on information concerning sweatshop labor may be convinced to justify their purchase, which happens if relevant ethical information is presented in an adequate and effective way (Auger et al., 2003).
Consumers are more likely to agree with economic justifications regarding sweatshops labor when considering a desirable pair of jeans made under poor working conditions than when considering the same jeans made without sweatshop labor (Paharia et al., 2013). Consumers are willing to pay a significant percentage of the value of the product when they are provided with specific ethical features (Auger et al., 2003). Consumers presume that doing the right thing means paying more, so they may choose to remain consciously ignorant of the issues involved in the products they buy (Eckhardt et al., 2010). Therefore, it is expected that economic justification may positively influence consumers’ willingness to pay. Additionally, Kraft et al. (2014) find that consumers are willing to pay a higher price under a higher level of transparency. Therefore, it may be expected that disclosing economic justification for a product will increase consumers’ willingness to pay.
Studies provided evidence that labels enclosing information about fair labor standards have a substantially positive effect on sales among one segment of shoppers in outlet stores (Hainmueller & Hiscox, 2012). Likewise, fair labor is recognized as a corporate core value, and thus shapes consumers’ attitudes toward the brand in a positive way (Yan et al., 2010). This means that enclosing information concerning economic justification is expected to increase consumers’ willingness to pay. Therefore, we may conclude that transparency positively influences the consumer’s willingness to pay, however, for now it is still unknown how consumers respond to economic justification of unethical labor wages. Therefore, to answer the research question, hypothesis 3 is stated as follows.
Hypothesis 3: Disclosing information concerning economic justification will positively influence the willingness to pay, compared to providing only information concerning the wages of the Chinese factory workers, whether or not in comparison with the Dutch daily average income.
4. METHODOLOGY
This chapter provides an overview of the method and research design for the analytical strategy. Firstly, the choice of method is discussed followed by a brief discussion of the research design, sample frame, product information and research design. Secondly, the variables, data collection and experiment procedure are discussed. The chapter ends with the data analysis.
4.1 Method
From a marketing perspective, it is beneficial to understand individual and consumer behavior, since it may translate into monetary value. This study researches the effect of economic justification on consumers’ willingness to pay. To complete this research to the fullest extend, the choice of method is closely explained.
As mentioned earlier, it is difficult to explain consumers’ responses to survey questions about hypothetical scenarios and choices. In these hypothetical studies, consumers represent themselves as ‘all caring’. However, many continue to ignore social issues as they repeat their traditional product preferences and purchases in actual situations (Devinney et al., 2006; Carrington et al., 2014). Another difficulty of doing research is that people are motivated to think differently about their own unethical behavior than the unethical behaviors of others insofar as they believe that they are more fair, honest and trustworthy than others (Messick & Bazerman, 1996; Messick et al., 1985). Furthermore, Hainmueller & Hiscox (2012) stated that consumers are willing to pay more for products that are made in workplaces with fair labor standards. However, their study was performed in an outlet store. Consumers who shop in an outlet store are known as price-sensitive buyers hoping to find good deals, so they are likely to have the explicit goal of saving money by finding bargains. They are thus far less likely to respond to information about ethical product attributes than consumers in other contexts (Hainmueller & Hiscox, 2012).
To overcome these shortcomings, this study employs Veylinx, an online Vickery auction. Experimental auctions avoid the problem of asking individuals hypothetical questions about intended behavior (Lusk & Shogren, 2007). People are expected to bid and commit to their reservation price, which is interpreted as their willingness to pay. Because the auction is binding, the bid amount will reflect actual consumer behavior. Therefore this experiment can
measure the consumers’ true willingness to pay.
4.2 Research Design
This study is a quantitative field research using primary source data. The research uses a 2 by 2 by 1 matrix design manipulated through five experimental conditions that are presented and discussed below (see Table 1, and Figures 1 and 2).
Figure 1: Treatment Matrix
Treatment Treatment content Treatment description
A True price original No information disclosure
B Baseline (Wages factory workers) Information concerning the average wages per day of factory workers are displayed
C Wages Chinese factory workers x Dutch average income
Information concerning the wages of Chinese factory workers per day are disclosed and compared to the Dutch daily average income
D Wages Chinese factory workers x economic justification
Information of the wages per day are disclosed together with economic justification
E Wages Chinese factory workers x Dutch average income x economic justification
Information of the wages per day are disclosed, compared to Dutch daily average income together with economic justification
Table 1: Treatment Overview
Treatment A Treatment B Treatment C Treatment D Treatment E
4.2.1 Treatment A: True Price Original
The participants are not exposed to any additional information disclosure concerning the wages of Chinese factory workers, Dutch daily average income or economic justification. As a base, the measurements of the bag are provided together with information concerning the backpack’s heritage, depicted as made in China. This information will be consistent throughout the rest of the treatments. The advertisement of True Price Original is shown in Appendix 4.
4.2.2 Treatment B: Baseline
This treatment is the baseline of the study. The Herschel Backpack is displayed in combination with information concerning the income of Chinese factory workers, which is €9,25 per day (National Bureau of Statistics of China, 2015). The advertisement of the Baseline is shown in Appendix 5.
4.2.3 Treatment C: Wages Chinese factory workers x Dutch average income
The Herschel Backpack is presented together with information concerning the wages of Chinese factory workers and Dutch average income, which is €62,74 per day (€22.900/365
No additional information
The average income of a
factory worker in China is €9.25 per day The average income of a
factory worker in China is €9.25 per day The average income of a
factory worker in China is €9.25 per day The average income of a
factory worker in China is €9.25
per day The average
income in the Netherlands is €€62.74 per
day
This income is a lot higher
than that offered in industries such as agriculture The average income in the Netherlands is €€62.74 per
day This income is
a lot higher than that offered in industries such as agriculture Figure 2: Experimental Conditions
days = €62,74) (Nationaal Bureau van de Statistiek, 2015). The advertisement of treatment C is presented in Appendix 6.
4.2.4 Treatment D: Wages Chinese factory workers x economic justification
In this treatment, the Herschel Backpack is presented together with information concerning the wages of Chinese factory workers and their economic justification. The economic justification states: “This income is much higher than their alternatives, such as working in agriculture”. The advertisement of wages Chinese factory workers x economic justification is shown in Appendix 7.
4.2.5 Treatment E: Wages Chinese factory workers x Dutch average income x economic justification
In this treatment, the Herschel Backpack is presented with all the information provided in the previous treatments (A-D): information concerning the wages of Chinese factory workers, their economic justification and Dutch average income. The advertisement used for wages Chinese factory workers x Dutch average income x economic justification is shown in below in Figure 3.
4.3 Sample Frame
Of the Veylinx member group, around 5.000 are active, meaning they bid regularly. Its member base is represented by Dutch society in terms of gender, age and socio-economic profile. This study invited 1.234 members, and 511 members responded (N=511), with a completion rate of 88%. Participants are not able to participate in an auction without indicating a bid amount. Consequently, for the dependent variable willingness to pay, no missing values are detected. The respondents consisted of 284 (55.6%) men and 227 (44.4%) women and were born between 1939 and 1999, with a mean birth year of 1973. In Table 2, further details on the whole sample are presented. The table shows that the average bid of the total sample is €8.97 with a maximum of €100.
Table 2: Descriptive statistics of total sample
N Minimum Maximum M SD
Gender 511 0 1 .44 .497
Age 511 1999 1939 1973.19 13.39
Bid (in eurocents) 511 0 10000.00 896.59 1237.75
Socially conscious 448 1 5 2.34 .986
Aware of income inequality 448 1 5 1.94 .956
Against sweatshops 445 1 5 2.47 1.051
Bid amount in Eurocents
4.4 Product Information
Five identical black Herschel Heritage Backpacks are auctioned in five different treatments. The backpack is produced in China and costs $54.99 (€49.03) on the Herschel website. It has a classic backpack silhouette that pairs vintage style with modern construction (Herschel.com, 2015). Its measurements are 18" (H) x 12" (W) x 5.5" (D) and its volume is 20 liters.
4.5 Variables
4.5.1 Dependent Variable
The dependent variable of this study is consumers’ willingness to pay. This variable is chosen because it reflects the extent to which consumers are willing to sacrifice money to gain a desirable product. This variable is measured as the maximum price that consumers are willing to pay, i.e., the bid. In this way, the study is able to evaluate to what extent economic justification influences the participants purchasing behavior.
4.5.2 Independent variables
All participants are randomly assigned to one of the five treatments. Measuring the effect of economic justification on willingness to pay will help companies to present and thus sell their products more effectively. This study investigates the effect of economic justification in four different stages.
4.5.3 Control variables
The three control variables are awareness of inequality, social consciousness and sweatshop aversion. Three questions are asked after the bidding using a five-point Likert scale (1=fully agree to 5=fully disagree), provided in Appendices 8 and 9.
4.6 Data Collection
This thesis employs a quantitative research design and collects its data from an online auction named ‘Veylinx’. Veylinx is a Dutch online SPSB experimental Vickrey auction platform founded by El Haji and Kuijken, both scholars from the University of Amsterdam. The platform possesses over 5.000 panelist members. A Vickrey auction is a characterized by written biddings that consumers submit without knowing the bids of other participants. Therefore, participants will not bid more than they are willing to pay. Many studies in the past are researched through hypothetical situations, unlike Veylinx, which bases its results on real situations and thus more accurate situations (Veylinx.com). By being concrete and using real money, Veylinx studies the ideal target audience and tests which communication form works best and how people respond to new products and services.
4.7 Experiment Procedure
Firstly, panel members are recruited on a complete voluntary basis. Once registered (i.e. filling in name, age, gender and e-mail address), the members receive an invitation to participate in an auction. Since the product is only shown when a member participates, self-selection is eliminated. All participants are randomly assigned to one of five treatments, of which none of the members are aware. Contestants were asked to provide a legally obligated bid that is equal to their maximum willingness to pay. All the members were made aware of the legal obligation to pay, which obliges them to accept the auctions’ terms and conditions and thus makes them aware that all bids are binding. After placing their bids, participants are asked to answer three questions related to the auction (Appendices 8 and 9).
Once the auction expires, all participants receive an e-mail announced the winning bid along with the second highest bid. The second highest bid is revealed because the participant with
the winning bid only pays the price equal to this second highest bid. The table summary of the experiment procedure is presented in Appendix 10.
4.8 Data Analysis
Before analyzing the results, the groups and the analytical strategy are explained.
4.8.1 Groups
The participants were divided into two focus groups because of the high percentages of zero bids. The first group consisted of participants bidding 50%-100%, who were willing to pay more than €5 for the Herschel Backpack.
Paharia et al. (2013) found that agreement with economic justifications was higher for sweatshop-made products of high desirability than for products with low desirability. Therefore, participants who had more motivation in product desirability were more likely to agree with economic justifications than those who had less motivation (Paharia et al., 2013). Therefore, this study will exclude the 50th
percentile bids.
The first group that is analyzed in the results section is the upper 50%. This group is divided into two new groups. The group 75%-100% is interpreted as consumers who were very willing to buy the auctioned product and thus were determined to buy this product. The other group was the percentile 50%-75%, consumers who did not fully desire to buy the product yet and are thus most likely to be influenced by the information provided. Since these consumers are still able to be convinced, this research will mainly focus on the third group, 50%-75%.
4.8.2 Analytical Strategy
The data have been checked for any errors in the data set. For the dependent variable WTP, no outliers and errors were detected. This is because contestants were not able to participate in the auction without entering a bid amount.
5 RESULTS
This section provides an overview of the tests used to analyze the data. First the descriptive statistics are discussed, second the hypotheses are tested and finally the regression analysis is performed. SPSS is used for analyzing throughout this section.
5.1 Descriptive Statistics
Descriptive statistics are presented in Table 3. Willingness to pay is positively related to birth year, r (509) = .182, p < .01. No other correlations are found between WTP and the other variables. The means, standard deviations and correlations of the treatments are shown in Table 4. The highest mean is found in True Price Original, (M = 1009.94, SD = 1451.037), as well as for the highest bid (maximum = 10000 Eurocents). Appendix 10 shows an overview in a column graph.
Table 3: Descriptive Statistics
Variables Mean SD (1) (2) (3) (4) (5) (6)
(1) WTP 4.28 3.428 -
(2) Birth Year 1973,19 14.476 .182** -
(3) Gender .44 .497 .079 .002 -
(4) Socially Conscious 2.34 .987 .002 .179** -.050 -
(5) Aware of income inequality 1.94 .956 .000 .128** -.020 .572** -
(6) Against sweatshops 2.47 1.051 .017 .125** -.064 .273** .277** -
** Correlation is significant at the .01 level (2-tailed). * Correlation is significant at the .05 level (2-tailed).
5.2 Hypothesis testing
5.2.1 Information disclosure wages garment workers
First, a one-way ANOVA is used to conclude if there are any differences in bid amount between the treatments. In order to test the hypotheses, the relationships per treatment were tested by means of a contrast analysis in the one-way ANOVA test (see Appendices 12 through 14).
For the upper 50% there was a significant difference between the bid amount and the treatments, F (4, 506) = 2.49. For the group 50%-75% there was also a significant difference between the bid amount and the treatments, F (4, 506) = 17.05.
The first hypothesis stated that disclosing information concerning the daily income of a Chinese factory worker positively influences consumers’ willingness to pay. In order to test this hypothesis, True Price Original and the Baseline are compared by means in a one-way ANOVA test using contrast analysis. Thus, the mean of disclosing no additional information is compared to the mean of providing information concerning the wages of the Chinese factory workers.
For the upper 50%, participants are willing to pay more for leaving out any additional product information (M = 7.38, SD = .608), compared to the Baseline, only providing Chinese factory wages (M = 7.07, SD = .616), t (253) = 2.47, p = .014.
For the group 50%-75%, participants are also willing to pay more in the situation without providing additional information (M = 6.86, SD = .203), compared to the baseline; disclosing Chinese factory wages (M = 6.64, SD = .308), t (128) = 2.88, p = .005. It is safe to state that when providing information concerning the wages of Chinese factory workers, consumers are willing to pay less for the product. Therefore hypothesis 1 is rejected.
5.2.2 Income comparison related to inequality aversion
In order to test the second hypothesis, the combination of treatments B and D is compared to the combination of treatments C and E. Hypothesis 2 stated that providing both information concerning the daily wages of Chinese factory workers and the Dutch daily average income, will negatively affect the consumer’s willingness to pay. Thus the treatments where the Dutch daily average income is given will be compared to the treatments where they are not provided.
For the upper 50%, there no significant evidence to support this hypothesis, t (253) = .63, p = .527. However, for the group 50%-75% there is significant evidence, stating that consumers’ willingness to pay decreases when comparing wages, t (128) = 5.55, p < .001. Concluding, for the upper 50%, hypothesis 2 is rejected, and for the group 50%-75%, hypothesis 2 is accepted.
5.2.3 Economic justification
Hypothesis 3 stated that disclosing information concerning economic justification positively influences consumers’ willingness to pay. This is be tested by comparing the combination of treatments B and C with the combination of treatments D and E. In the Baseline and wages Chinese factory workers x Dutch average income there is no economic justification.
For the upper 50%, participants are willing to pay more for the situation witch economic justification, t (253) = 1.94, p = .053, therefore hypothesis 2 is weakly supported. For the group 50%-75%, there is significant evidence that participants are willing to pay more for the situation witch economic justification, t (128) = 2.20, p = .030. It is safe to say that disclosing information concerning economic justification will increase the consumers’ willingness to pay for a product, and thus hypothesis 3 is accepted.
5.2.4 Research Question
The research question of this thesis is: To what extent does an economic justification of sweatshops affect consumers’ willingness to pay? This question can be answered by comparing the situation of disclosing information concerning the wages of the Chinese factory workers, to the situation where these wages are economically justified. Thus, the Baseline is compared to wages Chinese factory workers x economic justification.
For the upper 50%, participants are willing to pay more for economic justification, t (253) = 2.47, p = .014. For the group 50%-75%, there is significant evidence as well, t (128) = 5.54, p < .001. Therefore, it is safe to say that economic justification increases the consumers’ willingness to pay for a product, and therefore the research question of this study is answered.
5.3 Multiple Regression Analysis
The regression analysis is performed over the upper 50% participants.
Model 1 consists of the predictors of the four treatments (treatment B till E), with the first group as a reference category, declared a 3.4 % of the variance of bid amount, R2
226) = 2.01, p = .094. Furthermore, the regression-analysis showed a significant effect of the Baseline on the willingness to pay, when compared to True Price Original had a significantly lower bid amount, β = -.172, t (223) = 2.11, p = .036.
Model 3, the final model, consisted of the predictors of the four treatments, the means of the three variables and the interaction effects. This added 7.6%. The final model clarified 12.7%, R2
= .127, F (4, 211) = 1.62 p = .054, and therefore is weakly supported. Furthermore, the regression-analysis showed a significant effect of awareness in wages Chinese factory workers x Dutch average income x economic justification of income inequalities on the willingness to pay. This means that the more people are saying to be aware of income inequalities, the stronger the willingness to pay decreased, β = -.415, t (223) = 2.35, p = .020. There is also a significant effect of wages Chinese factory workers x Dutch average income on the willingness to pay, β = -.297, t (223) = 2.28, p = .023.
6. DISCUSSION
This study extends the understanding of the effect of economic justification on the willingness to pay. The purpose of this study is to answer the research question “To what extent does an economic justification of sweatshops affect consumers’ willingness to pay?” The question was tested by a quantitative experiment including five different levels of information to the consumers. First the implications, both theoretical and managerial are considered, followed by the limitations and implications for future research are specified.
6.1 Theoretical implications
Previous studies show that consumers are willing to support fair labor standards (Hainmueller & Hiscox, 2012; Carrington et al., 2014). However, Hainmueller and Hiscox (2012) investigated in an outlet environment, in which consumers were focused on finding good prices and therefore were far less likely to respond to information about ethical product attributes than consumers in other (retail) contexts. It was expected that information disclosure concerning economic justification would positively influence consumers’ willingness to pay (Paharia et al., 2013).
The first hypothesis states that disclosing information concerning the daily income of a garment worker would positively influence the consumers’ willingness to pay. Kraft et al. (2014) found that consumers are willing to pay more for products under a higher level of transparency. However, the results of this study indicate the opposite: Providing information about the wages of Chinese factory workers leads to a decrease of consumers’ willingness to pay for the product. Bidders with bids above the median are willing to pay significantly more when they do not have this additional information. This was consistent for the upper 50% as well as for the group 50%-75%. As mentioned before, Becchetti and Rosati (2005) assume that ethical consumption is motivated by a general aversion to inequality, as theorized by Fehr and Schmidt (1999), between rich consumers and poor workers in developing countries. Maybe people do not need comparative information, since they know that the wages are much lower than in their own country.
The second hypothesis stated that providing information concerning the daily wages of the Chinese factory workers in comparison with the Dutch average income would negatively affect the consumers’ willingness to pay. This compared to providing only information concerning wages of the Chinese factory workers whether or not with an economic justification. The hypothesis was tested by comparing treatment B and D to treatment C and E. Thus, the Baseline (wages Chinese factory workers) and wages Chinese factory workers x economic justification compared to wages Chinese factory workers x Dutch average income and wages Chinese factory workers x Dutch average income x economic justification. For the upper 50%, there is no significant evidence to support that information concerning income inequality negatively affects the consumers’ willingness to pay. However, it is safe to say that for the group of 50%-75%, consumers are willing to pay less, when comparing the (higher) income in their own country with the low wages of the Chinese factory workers. Implying, the group 50%-75% is negatively influenced by providing information concerning income inequality.
The third hypothesis stated that disclosing information concerning economic justification would positively influence the willingness to pay, compared to providing only information concerning the wages of the Chinese factory workers, whether or not in comparison with the Dutch average income. This hypothesis is tested by comparing treatments B&C to D&E. Thus, Baseline (wages Chinese factory workers) and wages Chinese factory workers x Dutch average income compared to wages Chinese factory workers x economic justification and wages Chinese factory workers x Dutch average income x economic justification.
Auger et al. (2004) found that consumers are willing to pay more when providing ethical features, however, which features were still unknown. Eckhart et al. (2010) added that consumers presume that doing the right thing means paying more; therefore, they may choose to remain subconsciously ignorant about the issues involved in the products they buy. The study builds upon the previous findings. For as well the upper 50% as for the group 50%-75% the hypothesis is significant. This means, that consumers are willing to pay more for products with information that explains an economic justification.
The research question states: To what extent does an economic justification of sweatshops affect consumers’ willingness to pay? This question was investigated by comparing the Baseline (B) with economic justification (Treatment D). Thus, only providing the wages of the Chinese factory in comparison to wages Chinese factory workers x economic justification:
which means economically justifying these low wages. For the upper 50% participants the research question was tested significant and remained the same for the group 50%-75%. Thus, it is safe to say that providing information about the wages of Chinese factory workers in combination with economic justification increases the consumers’ willingness to pay for a product.
In the end a regression analysis was performed. In treatment E, wages Chinese factory workers x Dutch average income x economic justification, it was interesting to find that the more the people claim they are aware of income inequalities, the stronger the willingness to pay decreased. This indicates that there is a negative relationship between awareness of income inequality and the willingness to pay. Thus, when people are less aware of income inequality, they are willing to pay more and the other way around.
6.2 Managerial Implications
Consumers attach different weight to CSR domains, reflecting their personal values and opinions. Hence, it is important for companies, and especially marketers, to consider their corporation's core business in relation to the values and opinions of its target customers when developing a solid marketing strategy (Öberseder et al., 2012). This study has certain implications for practitioners such as marketing strategists, who need to better understand the effect of information disclosure on the consumers’ willingness to pay. Even though consumers are willing to pay more for economic justification, there is still a group that is focused on and affected by the information concerning income inequality. Therefore, it is interesting to measure whether they are willing to pay more when justifying the income inequality.
6.3 Limitations and implications for future research
Even though there is significant evidence for the results of this research, there are some limitations and implications for future research.
First, there are some limitations regarding the sample. The members participating in this study are solely Dutch, which makes the study country-specific. It would be interesting to detect whether the outcomes hold across borders. Second, the auction is only provided online, which consequently excludes non-Internet users. This way, there is no written proof that it holds across borders and for non-internet users as well. Also, all the participants received an invitation through e-mail to participate and bid on a product which they did not intentionally
desire to buy. Therefore, this study recommends performing the same research in a retail context in which people want to buy a certain product. Expected is, that people who have the desire to buy a certain product and, will respond differently to information disclosure.
Third, the participants are considerably high educated (M = 3.94 on a 5-point Likert scale). This is because students of the University of Amsterdam mainly use Veylinx. Therefore, this phenomenon is not unexpected, since the users collect the participants themselves. Thus, there is no significant evidence that the results hold for a sample that is relatively less educated.
Interestingly, hypothesis 1, disclosing information concerning the daily income of a Chinese factory worker will positively influence consumers’ willingness to pay, is rejected. Other than Kraft et al. (2014) who found that consumers are willing to pay a higher price under a higher level of transparency. Apparently, it depends on what kind of information is given. It will be interesting to test what kind of information disclosure positively affects the willingness to pay.
For now, we know that economic justification had significant positive effect on the willingness to pay. However, this research only focused on the Herschel Backpack that was manufactured in China. It is uncertain whether the results will be the same for different brands and different products manufactured in different countries.
In conclusion, future research should investigate the same question, only for different brands and products in a different retail context.
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