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
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This enabled common coffee retail sellers to justify the raising of their coffee retail prices. Starbucks pointed out an important fact that the “continuity of supply can be as important as the purchase price” (Keat; Young, P. 62). When more and more coffee tree farmers left the market since 2000 as a result of coffee bean prices dropped to a level too low for the farmers to cover their cost, the long run supply will become insecure or even discontinue. When coffee retail sellers cannot get enough of its essential raw material, coffee beans, the line of production will stop in extreme case. Therefore, a steady and a continuous supply of coffee beans is essential to the survival of coffee retail market. This is why Starbucks claimed that they are willing to pay a higher price for their coffee beans in order to keep the coffee tree farmers in the market. It is only when the factor market keeps on operating while the coffee tree farmers keeps on growing and harvesting, the product market can gets its supply of coffee beans. If the factor market does not survive, neither will the product market.
Solution to Problem 1 – Starbucks is Price Maker and Its Demand is Inelastic. Solutions include introducing more sellers into the market, branding and product differentiation campaign by other coffee sellers and government intervention. Starbucks is the price