Scholarly Coffee Articles

Firms that practice second-degree price discrimination may distort product characteristics away from their efficient levels (e.g., the small version of a product is "too small"). This paper offers the first empirical study of this product design issue. Using data from a specialty coffee market, I estimate a structural utility model that allows for consumer screening under vertical preference heterogeneity. Comparisons of cost data and the estimated benefits from changing product characteristics confirm some of the central predictions of nonlinear pricing theory. Product design distortions are relatively large for drinks that are not the most profitable but over which the firms hold market power. As drink size increases, the estimated distortions decrease toward zero for the drinks with the largest price-cost margins. This result provides empirical support for the "no distortion at the top" prediction from theory.
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In the early 1990s earnings by coffee producing countries (exports f.o.b.) were some US$10-12 billion and the value of retail sales of coffee, largely in industrialised countries, about US$30 billion. Now the value of retail sales exceeds US$70 billion but coffee producing countries only receive US$5.5 billion. Prices on world markets, which averaged around 120 US cents/lb in the 1980s, are now around 55 cents, but this year reached their lowest point in real terms for 100 years. The fall in prices over the last five years has been dramatic and is illustrated in the graph below. The drop in earnings is particularly severe for those countries such as Uganda where coffee provides a large portion (over half in this case) of export revenues.
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Though the international market for Fair Trade products represents only a minor share of global trade, it is growing rapidly. The world market for Fair Trade products is currently valued at US$ 400 million, with sales growing at close to 30 percent per year (Fair Trade Federation 2000). Coffee, the first labelled commodity, remains the backbone of the Fair Trade system. Recently established initiatives in North America are making Fair Trade commodities available outside the movement's European home, fueling the market's rapid growth. The United States has in just a few years become one of the largest importers of Fair Trade labelled coffee and may over time double the world market. The Fair Trade market is poised to expand dramatically over the next decade as labelled commodities become more widely available and better known.
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