South-Western College Publishing - Economics  
Coffee Cartel
Subject Cartels
Topic Oligopoly
Key Words World price, harvest, consumers, prices, global supply, producers, suppliers, overproduction, incentive to cheat, cartel
News Story

The world price of coffee has fallen to 67.7 cents per pound, the lowest level since November 1993. The cause is a record harvest in Mexico and a better-than-expected crop in Brazil. Consumers are starting to see lower prices in stores: for example, Procter and Gamble has reduced the price of Folgers coffee three times since August 1999, the latest time by 8 percent.

However, the Association of Coffee Producing Countries (ACPC), representing 70 percent of global supply, is meeting to discuss withholding as much as 15 percent of the coffee crop until prices rise, perhaps to as much as $1.20 a pound. Brazil and Columbia, the two biggest producers, are behind the plan.

Previous attempts since 1993 to manipulate the market have failed. Suppliers are fragmented and are generally small and poor. There is chronic overproduction. Coffee costs a lot to store in warehouses. There is a significant incentive to cheat. Also, up until now, the third-, fourth-, and fifth-largest producers - Mexico, Guatemala, and Vietnam - have decided not to join the cartel.

(Updated June 1, 2000)

1. a) What is a cartel?
  b) Why does it exist?
  c) Draw a price-output diagram of the coffee bean industry assuming that ACPC is able to act as a cartel. Include the demand and marginal revenue curves, and the average total and marginal cost curves. Show what happens to the equilibrium price and output of coffee when the cartel is effective compared to when the market operates freely.
  d) Who wins and who loses as a result of the operation of the cartel?
2. a) If a cartel is to be effective, what conditions must be met?
  b) Are these conditions met in the coffee market?
3. Why is the coffee cartel likely to be less successful than the oil cartel, the Organization of Petroleum Exporting Countries (OPEC)?how the effect of the increased marketing payments on the cost curves assuming that they bear at least some relation to the output of cola. Justify why you moved the curve(s) you did.
Source Chris Kraul, 'Cartel may withhold coffee beans to hike price,' The Tampa Tribune, April 21, 2000.

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