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

Abstract

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.coffee, fair trade, oligopsony