This paper addresses two related topics in applied economics. The first section examines the coffee market's competitive structure, arguing that while it resembles perfect competition, significant barriers to entry and exit, geographic constraints on production, and buyer bargaining power distinguish it from a true perfectly competitive market. It also evaluates Starbucks' claim that paying higher prices to growers would worsen the market surplus. The second section summarizes an Economist article on industrial policy, tracing how governments in both developing and developed nations intervene in markets, with examples ranging from Chinese "pillar" industries to green energy programs and strategic defense contractors.
The market for coffee is not perfectly competitive, but it comes close. The conditions of perfect competition require that there be many sellers and buyers, that products be similar in nature, that there are few barriers to entry for new producers, and that prices be determined by supply and demand (Investopedia, 2011). While there are indeed many buyers and sellers in the coffee market, buyers are often significantly larger than sellers, which creates some bargaining power imbalance. The products are roughly similar in nature, though there are meaningful differences between the two main coffee types — arabica and robusta — and between the output of specific farmers, as evidenced by the emergence of single-origin and organic coffees.
Additionally, coffee has a limited geography of production, which constrains the degree to which output can be increased in response to demand. This geographic limitation constitutes a barrier to entry: England, for example, cannot enter the coffee market. Despite these complications, the market is broadly controlled by supply and demand. Thus, while the coffee market resembles perfect competition in many respects, the conditions for it are not fully met.
The most important consideration affecting the coffee market is the presence of barriers to both entry and exit. Only a limited number of nations can produce coffee, and this barrier to entry creates an effective ceiling on total coffee production. There is also, to some extent, a floor on production. The land on which coffee grows — typically on tropical mountainsides — is not necessarily suitable for cultivating other commodities. Farmers who grow coffee therefore cannot easily exit the market without sacrificing their primary means of earning a living.
As a result, one or two seasons of difficult economic conditions may not be sufficient for supply to adjust to new market realities. Unlike industries where producers can swiftly redirect resources, coffee farmers are largely locked into their current activity. This structural rigidity has important consequences for how the market reaches — or fails to reach — equilibrium.
Starbucks' argument that paying higher prices to growers will increase the market glut is accurate. The coffee market is in a state of constant surplus, which means that some producers need to exit the market. If Starbucks pays higher prices to farmers, that will only encourage more farmers to enter, worsening the glut rather than alleviating it.
Coffee growers are currently operating at a position of economic loss. There is too much production, and the high exit barriers in the industry mean that this condition could persist for an extended period. Growers are producing beans for approximately 80 cents per pound while selling them for only 50 cents per pound. For growers to reach a position of zero economic profit, either some producers would need to exit the market or demand would need to increase substantially.
The article "Picking Winners, Saving Losers," published in The Economist, discusses the rise of government intervention in markets through industrial policy. Several examples are cited, including a French toymaker, the U.S. government's intervention through automobile and bank bailouts, and European involvement in knowledge industries. The article notes that while poorer countries often use industrial policy to protect nascent industries and foster growth in targeted sectors, this pattern is not exclusive to the developing world. In recent years, industrial policy has enjoyed something of a comeback in Western nations as well.
For politicians, industrial policy is a risky undertaking. Some examples have proven successful, while others have been abject failures that cost significant amounts of taxpayer money. The underlying tradeoff is that some industries are considered more valuable than others with respect to foreign direct investment, job creation, or other outcomes governments find desirable. In developing nations, industrial policy may support young industries and help them grow; in the West, it more often results in the government propping up an industry that is already struggling. Several American cases are cited in the article to illustrate this pattern.
"China, green energy, and electric car policy case studies"
"Strategic importance drives industrial policy beyond economics"
You’re 67% through this paper. Sign up to read the remaining 2 sections.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.