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The competitive structure of the coffee industry and the impact of fair trade coffee Kojima, Hiroaki

Abstract

This thesis examines the current coffee market especially from the viewpoint of market structure. Though several previous literature suggest the presence of market power by large roasters or distributors in consuming countries, none of them showed any models or empirical analyses to prove this. Thus, the main research question of this thesis is to examine whether or not the distribution system in consuming countries has market power within the coffee market. To answer this question, the Farm-Retail Price model developed by Wohlgenant (1989) and Holloway (1991) (the Holloway model) was applied to the Canadian coffee sector. The advantage of this Holloway model is that linear restrictions imposed on the parameters in three-equation model can be used to test whether or not market sectors of agricultural commodities are competitive. The Canadian coffee market was picked up as an example because the coffee market inside Canada is not so large and it might be easier for several companies to obtain market power. Test results for market competitiveness, using Canadian data, provide evidence which implies that the Canadian coffee market might be perfectly competitive at the national level. Nevertheless, as regression results show a relatively poor fit to the data, these test results could be a rejection of the model itself. These test results indicate that the direct application of the Holloway model might have several problems in case of the Canadian coffee market. For example, the import price might need to be treated as exogenous and a time lag might be necessary to reach the market clearing condition. Considering that the Holloway model to examine perfect competition does not incorporate these elements in the model, the Holloway model seems to have certain limitations. Then, the findings of empirical analyses are used to examine the meaning and impact of FT coffee. According to several literature, FT coffee scheme appears to be based on the idea that large roasters in consuming countries are distorting the world coffee market. However, regression results weakly indicate that the Canadian coffee market is close to competitive. These findings suggest that FT coffee scheme may be built on an incorrect premise, at least in Canada. Since the willingness to pay for FT coffee seems higher than that for non-FT coffee, FT coffee is expected to have an effect to shift the retail demand curve rightward. It is considered that this effect leads to an increase in the equilibrium price and quantity. Nevertheless, as the market share of FT coffee among the total coffee is very small, this impact to increase coffee prices will be very limited. After all, the introduction of FT coffee cannot rectify main causes of the low and unstable world prices such as an oversupply of coffee and the cyclical fluctuation of the world coffee production. Considering also the market scale of FT coffee, it can be concluded that FT coffee does not have a large impact on the world coffee market.

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