Demand for coffee in Sweden: The role of prices, preferences and market power

Abstract

There is a widespread belief that consumer coffee prices are high relative to bean prices and that lower consumer prices would lead to substantial increases in bean exports from Third-World countries. This issue is evaluated by analysing how retail prices, preferences and market power influence coffee demand in Sweden. A demand function is estimated for the period 1968-2002 and used, together with information on import prices of coffee beans, to simulate an oligopoly model. This approach gives estimates of the maximum average degree of market power and shows how coffee demand would react to reductions in marginal cost to its minimum level. The maximum level of market power is found to be low, but it generates large spreads between consumer and bean prices because the price elasticity has low absolute values. Moreover, the impact of a price decrease would be small because long-run coffee demand is dominated by changes in the population structure in combination with different preferences across age groups. Hence, a change to perfect competition would only have a negligible effect on bean imports.

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“…This suggests another important issue to be addressed in the 10 While most of these authors find evidence of market power in the U.S. roasting industry, Bettendorf and Verboven (2000) find price transmission in the Netherlands to be fairly competitive. Also in European roasted coffee markets, Durevall (2003Durevall ( , 2005 finds no direct evidence of market power, but does find asymmetric wholesale-retail price transmission. Daviron and Ponte (2005) argue that roasters command significant power relative to retailers (ch.…”