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‘Fair trade’ coffee and the mitigation of local oligopsony power

Author

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  • Suphanit Piyapromdee
  • Russell Hillberry
  • Donald MacLaren

Abstract

In recent years, there has been considerable growth in ‘fair trade’ markets for several commodities, most notably coffee. We argue that coffee is grown under conditions that might well subject growers to the market power of downstream intermediaries (processors). Using an approach designed to evaluate the effects of state trading enterprises on trade and welfare, we develop an oligopsony model of intermediaries. In this model, fair-trade processors optimise a welfare function that includes the producer surplus of coffee growers. This concern for growers' welfare among some processing firms helps to alleviate the market power distortion. We calibrate the model to price data reported by a fair-trade organisation and consider the counterfactual removal of fair-trade behaviour by processors. As expected, the income of coffee growers (in aggregate) is reduced, though the effects are quite small.

Suggested Citation

  • Suphanit Piyapromdee & Russell Hillberry & Donald MacLaren, 2014. "‘Fair trade’ coffee and the mitigation of local oligopsony power," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 41(4), pages 537-559.
  • Handle: RePEc:oup:erevae:v:41:y:2014:i:4:p:537-559.
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    File URL: http://hdl.handle.net/10.1093/erae/jbt028
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    References listed on IDEAS

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    1. Pierre Kohler, 2006. "The Economics of Fair Trade: For Whose Benefit? An Investigation into the Limits of Fair Trade as a Development Tool and the Risk of Clean-Washing," IHEID Working Papers 06-2007, Economics Section, The Graduate Institute of International Studies, revised Oct 2006.
    2. Lopez, Rigoberto A. & You, Zhikang, 1993. "Determinants of oligopsony power : The Haitian coffee case," Journal of Development Economics, Elsevier, vol. 41(2), pages 275-284, August.
    3. Sexton, Richard J. & Lavoie, Nathalie, 2001. "Food processing and distribution: An industrial organization approach," Handbook of Agricultural Economics,in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 15, pages 863-932 Elsevier.
    4. Fabrizio Adriani & Leonardo Becchetti, 2004. "Fair Trade: A 'Third Generation' Welfare Mechanism to Make Globalisation Sustainable," CEIS Research Paper 62, Tor Vergata University, CEIS.
    5. Steve McCorriston & Donald MacLaren, 2007. "Deregulation as (Welfare Reducing) Trade Reform: the Case of the Australian Wheat Board," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(3), pages 637-650.
    6. Poret Sylvaine & Chambolle Claire, 2007. "Fair Trade Labeling: Inside or Outside Supermarkets?," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 5(1), pages 1-24, November.
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    Cited by:

    1. Kopp, Thomas & Bümmer, Bernhard, 2015. "Moving rubber to a better place - and extracting rents from credit constrained farmers along the way," EFForTS Discussion Paper Series 9, University of Goettingen, Collaborative Research Centre 990 "EFForTS, Ecological and Socioeconomic Functions of Tropical Lowland Rainforest Transformation Systems (Sumatra, Indonesia)".
    2. Podhorsky, Andrea, 2015. "A positive analysis of Fairtrade certification," Journal of Development Economics, Elsevier, vol. 116(C), pages 169-185.
    3. Mujawamariya, Gaudiose & Burger, Kees & D'Haese, Marijke F.C., 2012. "Behaviour and performance of traders in the gum arabic supply chain in Senegal: Investigating oligopsonistic myths," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126236, International Association of Agricultural Economists.
    4. Kopp, Thomas & Brummer, Bernhard, 2015. "Traders and Credit Constrained Farmers: Market Power along Indonesian Rubber Value Chains," 2015 Conference, August 9-14, 2015, Milan, Italy 212012, International Association of Agricultural Economists.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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