Market Power in International Commodity Trade: The Case of Coffee

Abstract

This paper studies the impact of market power on international commodity prices. I use a standard oligopoly model and exploit historical variations in the structure of the international coffee bean market to assess the impact of a cartel treaty on coffee prices and its global welfare consequences. The results suggest the International Coffee Agreement (ICA, 1965-89) raised its price by 75% above the Cournot-competitive level, annually transferring approximately $12 billion from consumers to exporting countries, and its lapse in 1989 explains four-fifths of the subsequent price decline, that is, the "coffee crisis."

Keywords: Collusion, Commodity, International Trade, Market Power, Oligopoly

JEL Classification: D43, F12, F13, F14, F35, F51, F53, G13, L11, L13, L41, O13, O16, O19, Q17