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Is the coffee market perfect competition

It is estimated that while world coffee prices hover around 50¢ per pound, production costs are around 80¢ per pound. According to a report issued in September 2002 by the relief agency Oxfam, prices are at their lowest in 100 years, thereby leaving 25 million farmers in crisis. Banks dependent on the industry are collapsing.

It is ironic that in a world of designer coffees - mochas and lattes - a worldwide glut of coffee beans has farmers and pickers suffering. One of the hardest hit places is Nicaragua, where the coffee crop is wilting and the people are beginning to starve.

Oxfam accuses the roasting companies - Proctor & Gamble, Nestle SA, Kraft Foods Inc., Sara Lee Corp., and Tchibo Holding AG are the biggest - of profiting from the crisis and urges them to pay higher prices. The companies reply that they cannot be blamed for the oversupply, and that paying higher prices would encourage farmers to produce more coffee that nobody wants.

The company taking the most heat is Starbucks Corp., the designer-coffee maven, among the top ten coffee buyers in the world. This world-wide chain has a lot to lose if their customers, especially those of college age, see it as a Third World profiteer.

"But the plight of the world's financially struggling coffee farmer is a complicated one - and not all the fault of corporate coffee buyers. Farmers are caught up in the harsh world of commodity markets, where prices are based on supply and demand in a highly fragmented industry. A chronic coffee surplus has resulted in years of low prices."


1. Does the coffee market meet all six conditions of a perfectly
competitive market? List each condition of perfect competition and
briefly explain how each condition does or does not apply to this

Note: Keep in mind that this is the coffee GROWERS market, not the
coffee roasters market.

Solution Preview

The six conditions of a perfectly competitive market are:

1. Atomicity
The coffee growers market does meet this condition. There are many small producers and the actions of one have no significant impact on others. Coffee growers are price takers in the same way as we don't choose what the US exchange rate is to another currency.

2. Homogeneity
Generally speaking we can say that there is no product differentiation. However, as we have recently seen, coffee ...

Solution Summary

Answers the question, does the coffee market meet all conditions of perfect competitition.