Starbucks Coffee: Buy Low Sell High
Abstract
This paper is a case analysis of coffee market. The purpose of this paper is to study the supply and demand mechanism through the case analysis of Starbucks in coffee market. This paper has three main sections. The first two section states the problems in coffee market and its ramifications. The first main problem is that Starbucks being the price maker in the oligopolistic coffee retail market, Starbucks exerts its market power to set its coffee retail price much higher than other coffee sellers. The second problem facing by the coffee retail market is unsteady supply of coffee beans. The third section states the proposed solution to the above two problems. Possible solutions for the first problem include introducing more sellers into the market, branding and product differentiation campaign by other coffee sellers and government intervention. Possible solutions for the second problem include backward integration and product diversification. Case Analysis
Problem Definition 1 – Oligopolist Exerts Market Power over Prices
Starbucks buys coffee beans at low prices but sells the coffee in retail market at relatively higher prices than other coffee retail sellers. This is what described as “buy low sell high” (Keat; Young, P. 61). Starbucks is able to buy low because of coffee beans prices goes down as a result of overproduction of coffee beans in 2000-2003. Starbucks is able to sell high because of its market position in coffee retail market as being an oligopolist. Starbucks being an Oligopolist in coffee retail market acts as price maker “by exercising varying degrees of control over the price of their product” (Keat; Young, P. 61). Coffee retail market is operated as imperfectly competitive market. Starbucks is able to exert its market power over retail coffee price by its ability “to differentiate their product through advertising, brand name, or special features or add-on services” (Keat; Young, P. 61). As a result, they are able
This paper is a case analysis of coffee market. The purpose of this paper is to study the supply and demand mechanism through the case analysis of Starbucks in coffee market. This paper has three main sections. The first two section states the problems in coffee market and its ramifications. The first main problem is that Starbucks being the price maker in the oligopolistic coffee retail market, Starbucks exerts its market power to set its coffee retail price much higher than other coffee sellers. The second problem facing by the coffee retail market is unsteady supply of coffee beans. The third section states the proposed solution to the above two problems. Possible solutions for the first problem include introducing more sellers into the market, branding and product differentiation campaign by other coffee sellers and government intervention. Possible solutions for the second problem include backward integration and product diversification. Case Analysis
Problem Definition 1 – Oligopolist Exerts Market Power over Prices
Starbucks buys coffee beans at low prices but sells the coffee in retail market at relatively higher prices than other coffee retail sellers. This is what described as “buy low sell high” (Keat; Young, P. 61). Starbucks is able to buy low because of coffee beans prices goes down as a result of overproduction of coffee beans in 2000-2003. Starbucks is able to sell high because of its market position in coffee retail market as being an oligopolist. Starbucks being an Oligopolist in coffee retail market acts as price maker “by exercising varying degrees of control over the price of their product” (Keat; Young, P. 61). Coffee retail market is operated as imperfectly competitive market. Starbucks is able to exert its market power over retail coffee price by its ability “to differentiate their product through advertising, brand name, or special features or add-on services” (Keat; Young, P. 61). As a result, they are able
References: Keat, G. Paul; Young, K. Y. Philip. (2009) Managerial Economics: Economics Tools For Today’s Decision Makers (6th ed.). USA: Prentice Hall.