Towards Understanding Prices and Ethics: Ethical Consumers with Price-Dependent Utilities

This paper analysis ethical consumption behavior with price-dependent ethical preferences. It extends the definition of goods to include ethical values in the preferences and introduces a mathematically tractable definition of social labels paving the way for new theoretical and empirical developments. Relationships between the standard economic model and the ethical consumption model with price-dependent utilities are established.


Introduction
The theory on price-dependent preferences is sparse. The various hypotheses motivating the study of price-dependent preferences are: judging the quality of a good by its price (Veblen, 1899), "Snob appeal" of a good (Scitovsky, 1945), and treatment of money and other financial assets in temporal equilibrium models (Samuelson, 1947). The bulk of this research predominantly focuses on motivating price-dependent preferences and deriving generalizations and variations of the Slutsky equation with their implications for welfare analysis (Kalman, 1968;Pollak, 1977;Arrow & Hahn, 1991).
In this paper, we consider a new hypothesis demanding price-dependent preferences. In our model, prices do not only perform the role of efficient resource allocations but also inform consumers about ethical attributes of production and distribution. An increasing number of consumers base their daily consumption decisions on ethical values, such as human rights, environmentally friendly pro-

The Ethical Consumption Model
We assume there exists a group of socially responsible consumers represented by Such functions provide meaningful welfare analysis (Pollak, 1977;Arrow & Hahn, 1991). In our model prices do not only signal the scarcity of resources in their efficient allocation process but also all these things our consumers care about regarding ethical production and distribution.
Associated with an ethical price system p there are 1, , l n = ethically produced and distributed consumption goods. We now characterize a consumption  Each ethical value is indexed by 1, , j k ∈ and is assumed to be known to an informed consumer. The collection of all ethical values associated with a consumption bundle i x is an information array given by states that two physically identical goods produced under different ethical conditions are "nearly-identical" goods. The physically identical goods only differ in the way they are produced. Ethical consumers are informed consumers who can distinguish between such goods. A social label conveys this information to consumers. Our definition of a consumption good is a generalization of the characterization of goods by (Debreu, 1959), which are defined by their physical, temporal, and spatial nature, to goods which also depend on a set of ethical values.
We denote an ethical consumption bundle i e x by is the consumption space characterized by ethical attributese.
We label goods i i χ ∈  satisfying such characteristics as ethical conspicuous goods. We formalize this idea in the subsequent three definitions.
Definition 1 (Ethical conspicuous goods). An ethical conspicuous consump- by an array of descriptive ethical values e.
Using (1) and (2)  Note that l e is not a quantity in k  as in the Lancaster (1971) model, but a descriptive list of characteristics. Hence, it should not be confused with the mathematical definition of a vector, i.e., the inner product operation does not apply. In essence l e is a string of information. Ethical consumers base their consumption decisions on the basis of ethical values, such as human rights, environmentally friendly and sustainable production, and animal well-being. We hypothesize that they express moral superiority towards society via positive and negative consumption of ethical conspicuous goods. We consider ethical consumers who derive esteem from the consumption of "more expensive" ethical conspicuous goods. This relates our model to Veblen (1899) who discusses the evolution of society based on the competition of esteem and price-dependent preferences. This is similar to our model, the motivation for priced dependent preferences, however, is different.
We characterize the consumer's preference ordering q  by an ethical price index q associated with an ethical market price p . It is assumed that the price depending preference ordering q  is unaffected by a proportional change in all prices p (Pollak, 1977 We want to represent preferences, which do not only depend on ethical consumption bundles but also on relative prices, which inform consumers about the way goods are produced. We are going to consider utility functions of the form . Let the open normalized price simplex be denoted by 1 : : with its closure simplex defined by 1 : : 1 . We now formalize the hypothesis that consumers do not only have preferences for the physical properties of goods, but they also care about the way goods are produced. Hence by (2) and (4) we defined a preference relation of the is the price-dependent ethical utility function. Stiefenhofer (2019)   The disentanglement of the price system into a price index q which enters the utility function and a price system p which enters the budget constraint is a distinct property of our model 5 .

Main Results
This model captures two key elements of ethical consumption. 1) Consumption is restricted to the consumption of ethically produced goods as indicated by the social label i S , and 2) the utility of the consumer depends on some price index q, which, further informs the consumer about ethically produced goods.
Model I provided by (6)  The semicolon in the utility function indicates that the price index q is considered as a parameter. This is very desirable because it can be estimated empirically. The parameter q characterizes how an indifference map is placed into the consumption space. We now consider a characterization of the consumer's preferences for ethically produced goods based on the market price p . Using definitions 1, 3 and 4 we extend our basic model of ethical consumption to obtain:

Conclusion
Empirical studies suggest that there is a group of consumers with a high willingness to pay for ethically certified goods (Pelsmacker & Rayp, 2005). In our model, we explain this phenomenon by hypothesizing that ethical consumers maximize moral esteem by purchasing the more expensive ethical consumption goods. At the heart of this consumption behavior lies the assumption of conspicuous ethics suggesting a positive correlation between prices and demand for ethically produced goods.
Ethical consumers also care about minimum prices guaranteeing that producers comply with minimum wages and other ethical production standards. Commodities that do not satisfy a minimum price condition and some ethical characterization as described by a social label are boycotted by ethically conscious Theoretical Economics Letters consumers. In our model, the voluntary social label performs the role of separating the positive ethical consumption space from the negative consumption space, where consumers boycott consumption of unethically produced commodities 6 . The Fair Trade label is an example of a voluntary social labeling initiative based on an organized social movement and market-based approach to help producers in developing countries to obtain better trading conditions and promote sustainability. Fair Trade is a project generated by the demand for ethically labeled goods.

Conflicts of Interest
The author declares no conflicts of interest regarding the publication of this paper.