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'Fair Trade' Coffee and the Mitigation of Local Oligopsony Power

  • Suphanit Piyapromdee
  • Russell Hillberry
  • Donald MacLaren

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

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1057.

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Length: 37 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:mlb:wpaper:1057
Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
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Web page: http://www.economics.unimelb.edu.au
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  1. 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.
  2. 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.
  3. 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.
  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. 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.
  6. 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.
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