Introduction
Recent years, the coffee crisis affected many regions in the world leading to price decrease and market failure of many companies. The main tendencies on the coffee market today are uncertainly and instability. If nothing is done, the crisis will affect farmers and trade organizations leading to the bankruptcy of small and medium-sized enterprises. Because of the crisis, 26 million coffee farmers lost their source of income and bankrupted (Walk the Talk 2003). The consumer-buyer and his decisions are central to any market analysis that seeks to explore the relationship between forms of competition and consumer choice. To the business firms that sell to consumers, however, this aspect of demand is less important than consumer preferences, for it has been shown that families and individuals seek variety in goods and services and in shopping methods. The newly established price, 65 percent a kilo, could not cover all expenses and saved farmers from poverty. Another problem identified by economists is that global coffee consumption has failed and this situation worsened the crisis. “The quoted price had dropped below &1 per pound” (Walk the Talk 2003). Thus the lowest price was reached in 2003, 42 cents per pound.
The problem is important because it has a great impact on international trade and partnerships between international and local companies. In the markets in which consumers buy, competition takes many forms. Most models of economic theory analyze markets using a conventional definition of demand framed in terms of prices and quantities, which shows that buyers choose smaller or larger quantities, at higher or lower prices, of the same product or service. Strategy is not a game played against nature. Instead, it is an activity geared to secure an advantage over or deny advantage to, an adversary who is motivated, and not infrequently able, to thwart a company (Barro and Grilli 2003). The main countries that suffered from the coffee crisis are developing regions of the world relying on coffee export and favorable market conditions. The main regions affected by the crisis are Latin America, Africa, and East Asia.
Proposed Policy Solutions
The first of the proposed policy solutions are based on “the law of comparative advantage’ concept. The proposed policy is to export coffee beans with the lowest relative costs. Thus, these costs should cover the main expenses: amortization and labor resources. According to this model, countries export products with the lowest relative costs. In this case, because strategy is always devised ‘at home’-nationally or within a coalition — through the workings of a process beset with myriad domestic difficulties, the enemy is often neglected in deliberations. In fact, from the peacetime point of view of the strategic planner, the adversary is actually the easiest variable to manipulate (Froyen, 1995; Barro and Grilli 2003). This model will help to employ people and reduce the current unemployment rate which reaches 50% among farmers.
The second proposed concept is the specific factors model. The advantage of the country is based on “immobile endowments” which can be unique coffee beans and a country image. The proposed policy is product differentiation. It will be difficult to achieve it is the only possible solution to sell coffee beans on a global scale. The relation between non-price competition and consumers’ preferences makes information, on both sides of the market, critically important. As buyers of a general class of products, consumers confront many sellers of products that are closely equivalent: the consumer’s taste for variety is satisfied by the existence of a wide range of differentiated articles (Barro and Sala-i-Martin 2003). Given information about the differences in products and prices, an astute buyer could select the particular item that best fits his set of tastes and preferences; his choice would reflect not only the availability of substitutes but the degree of closeness to which they are equivalent.
The third concept for the coffee market is the imperfect competition model. The trade will be affected by the economies of scale and it will help coffee companies to overcome the crisis and add value to their products. The proposed policy is price competition. Sellers thus differ only in the quantities they offer at a given price; buyers differ only in the amount they are willing to purchase at a given price. Competition in such a market is price competition: many buyers and many sellers, each a minor part of the whole market, help to establish the equilibrium price that results. As in the case of monopoly, a specific example of the competitive model can be found only with an extremely narrow definition of the product (Wickens, 2008).
Costs
The costs of the first model are low but it will take time to introduce the policies. If consumers want what a monopolist is selling, they must either buy from him or go without. To cite a specific example of an existing monopoly, however, requires an extremely precise definition of the product or service. For example, in most urban areas public utilities are monopolies: there is only one telephone company, water company, gas company, electricity supplier. But if telephone service is defined as a form of communication, more than one supplier of such facilities exists telegraph, mail, and face-to-face conversation are among the other forms communication can take. Only insofar as the consumers find telephone service unique and are unwilling to substitute for it another form of communication does the company have a monopoly. The strength of the monopolist’s power, therefore, is a reflection of consumer preference (Wickens, 2008).
The costs of the second model are low, but it will bring desired outcomes only in half a year. The general class of products is differentiated because Brazilian coffee beans are not identical to other coffee beans. Each processor has taken steps to ensure this — by his selection of particular ingredients and the specific details of his technology; by the use of distinctive packaging and a brand name to identify his product; by his advertising of its superior quality or its appeal to gourmet tastes. But all such attempts are worthless unless the potential buyers — the consumers — are willing to recognize significant differences between coffee beans. If a firm competes by changing its output — for example, by introducing a product variation — its competitive position will be improved only if consumers accept the change, and prefer it to what is offered by others (Mankiw, 1994).
The third policy is the most efficient for the coffee market. Yet in neither case is the consumer indifferent to the sellers from whom he buys. It is true that one share of common stock is identical with another share; but the consumer is not only buying common stock, he is also shopping at his broker’s. Similarly, the consumer may well be indifferent as between the coffee beans from one country and that from another-but not if the first case sells to Starbucks and the second to a less known company. differ in the abundance (and relevance) of the information they offer and in their provision of credit; retail dairies may have different delivery schedules and will surely have nonidentical routemen (Froyen, 1995).
The expected outcomes of the first model are improved market position and stable growth achieved in a year. So the consumer’s preference for one seller over another exists; because the shopping or buying process cannot be separated from consumer choice, there is no possibility of finding identical sellers to consumers, and the model of pure or perfect competition is irrelevant to an analysis of consumer markets. The outcomes of the second model are product differentiation and short-term market stability. And each variation introduced into the shopping process will actually serve to differentiate only when consumers accept it as a means of distinguishing one retailer from another (Mankiw, 1994).
The best model for market change is the third one. Exactly parallel reasoning applies to firms. As sellers of a general class of product or service or shopping process, firms face many buyers, who have closely similar, yet different, preferences. Given adequate information about consumer preferences as well as estimates of the quantities that buyers will take at different prices, the profit-maximizing firm could produce the particular item that best fits its available resources of technology and know-how. The seller can differentiate his output from that of competitors most successfully by incorporating in his product or service the differences that consumers will find significant — by giving consumers, in short, what they want. The more information he has about consumer preferences, therefore, the better off is the supplier (Froyen, 1995).
Conclusion
The selected model will help to overcome the market crisis and stabilize the price of the international coffee market. In competition, each competing seller offers a unique output, but one that is closely similar to the output of others. The amount of differentiation depends on consumer preferences: the long-standing and acrimonious debate over “real” or “imagined” differences and “rational” or “irrational” preferences is quite beside the point.
Future research is needed to analyze the industry product differentiation and selling costs. Clearly, it is consumer preferences that establish the existence and the extent of product differentiation. The model of monopolistic competition places its emphasis on sellers’ attempts to differentiate their offerings via variations in the product or service or shipping process rather than price competition. All the empirical data so far presented support this analysis for the markets in which consumers buy. This is not to say that pricing is never used as a competitive weapon, or that these characteristics of comparative advantage apply with equal strength to all consumer purchases.
The main limitation is the lack of market information and real-life examples of model applications in the coffee market. Both types of information, however — that which is sought by consumers and that which is sought by producers -have an important bearing on market structure.
References
Barro, R. J. and V. Grilli (2003). Europea Macroeconomics, London: Macmillan.
Barro, R. J. and X. Sala-i-Martin (2003) Economic Growth, New York: McGrawHill.
Froyen, R. T. (1995) Macroeconomics: Theories and Policies, 5th edn, London: Prentice Hall.
Mankiw, N. G. (1994) Macroeconomics, 2nd edn, New York: Worth.
Wickens, M. (2008). Macroeconomic Theory: A Dynamic General Equilibrium Approach. Princeton University Press.
Walk the Talk. Oxfarm Briefing Paper. 2003.