Economic Analysis of International Cocoa and Chocolate Market

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  • Topic: Supply and demand, Aggregate demand, Aggregate supply
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  • Published : August 12, 2012
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Economic Analysis of International Cocoa and Chocolate Market

In the last 20 years various forces underlying chocolate market changes the market structure, which influences the market structure of cocoa beans, the most important raw materials for chocolate production, evidently. In this essay I will discuss the changing market structure of both markets, and the strategies that chocolate and cocoa producers employed to face challenging from the market. In addition, cocoa industry in most of cocoa planting countries plays a significant role in export revenue; hence, this essay will also analyze the effect of increasing demand for chocolate, fair trade, and policies on those regions from the macroeconomics point of view.

Before looking into the pricing and production decisions of the firms that operate, I will demonstrate the structure of chocolate and cocoa market primarily. The characteristic of chocolate market shows that it has a monopolistically competitive market structure. Many companies find their profits are constrained by tight price in the market (The Economist: Britain: Stuffed; Chocolate 2004, p. 29), which indicates the sever competition within the industry. Admittedly, some companies have a dominated status in the chocolate market, say, Kraft, Mars, Nestlé, Ferrero and et cetera. Yet some other chocolate firms that compete with those big brands account for a certain market share. Besides, unlike heavy industries which need considerable initial capital to set up a company, it does not cost much to start a chocolate business, and the producing process is much easier. Therefore, there is freedom of entry of new firms into the chocolate industry. Lastly, the product differentiation for chocolate is another evidence for chocolate market belonging to monopolistic competition. Different tastes of chocolate provide more choices to buyers, and in latest years other characteristic are vying for consumers’ attention, such as products with a fair trade label, organic or healthy chocolate make their product different from each other. But the innovation of chocolate is limited (The Economist: Britain: Stuffed; Chocolate 2004, p. 29), and they are still producing similar goods.

The structure of cocoa market belongs to perfect competition, but it is affected by the changing of chocolate market these years. Generally, thousands of planters in this industry produce standardized cocoa beans. For example there are around 800000 farmers in Ghana producing 379000 tonnes of cocoa ever year (Sean 2002, p. 29). In addition, they have not ability to differentiate their products from those of other farmers. Hence, those planters have not enough power to control prices. Although some barriers to entry relate to the restricted environment of planting cocoa, there are no barriers to exist from the cocoa market. However, in these years some cocoa producers are engaged into the production of organic cocoa to satisfy the demand from chocolate market, which could effectively differentiate their products from those standardized cocoa and enable organic cocoa planters to charge a higher price. Generally, the niche markets as organic and fair-trade markets are growing in both chocolate and cocoa market these years.

Now I will move onto the forces and strategies in both markets. Since the structure of chocolate market is of monopolistic competition, indicating chocolate sellers facing a highly, but not perfectly elastic demand curve, companies have to use several strategies to survive and maximize their profits in the bitter contest, relying upon the features of forces underlying the industry. Supply and demand are the forces that make market economies work. Specifically, consumers’ preferences, and the number of buyers are the main determinants of chocolate market demand, while resources’ prices influence supply significantly.

We may initially discuss changes in demand, assuming no other factors influencing supply. Demand for...
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