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A Dynamic Model of Oligopoly in the Coffee Export Market

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We estimate the degree of competitiveness and the adjustment paths of the two largest coffee exporters, Brazil and Colombia, using a subgame-perfect dynamic feedback model of oligopoly. There is evidence that major coffee exporters behave noncompetitively and that dynamics play an important role in determining outcomes (Marshall 1983). Since 1959, most exporting and importing countries have participated in a series of international coffee agreements (ICAs) that set export quotas (Fischer 1972; Bates and Lien 1985). It is alleged, however, that many countries regularly violate these quotas. In his survey of various ICAs, Gilbert (1987, p. 602) quotes critics who claim that the agreements “are no more than an internationally sanctioned producer's cartel.” He concludes that the agreements have resulted in higher prices rather than simply more stable prices (1987, p. 604). Greenstone (1981) also asserts that the large coffee producers have behaved as a cartel. Based on econometric models, de Vries (1975), Akiyama and Duncan (1982), Palm and Vogelvang (1986), and Herrmann (1986) argue that the ICAs have resulted in higher prices for member importing countries but lower prices for nonmember importing countries.

We view Brazil and Colombia as a dynamic coffee duopoly facing a fringe with exogenous exports. During the sample period of 1961/62 through 1983/84, Brazil and Colombia's share of total world exports averaged 43 percent. Brazil and Colombia act like large “firms” in that each centrally controls exports. The Brazilian Coffee Institute (IBC) controls supply and price; supervises grading, packing, and weighing; and sets quotas within the country. The Colombian Federation of Coffee Growers (FNCC) buys from small farmers; evaluates, blends, grades, and cleans coffee; and manages the market through prices and taxes. In the absence of an ICA in 1974, Brazil and Colombia attempted to form an explicit producers’ cartel and were later joined by other (smaller) producers. At various times, particularly during extended ICA negotiations from 1978 into 1980, the Brazilian and Colombian governments appeared to intervene in the market to maintain stability.
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Document Type: Research Article

Publication date: January 1, 2006

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