Market Power in International Commodity Trade: The Case of Coffee

This paper studies the impact of market power on international commodity prices. I use a standard oligopoly model and exploit historical variations in the structure of the international coffee bean market to assess the impact of a cartel treaty on coffee prices and its global welfare consequences. The results suggest that the International Coffee Agreement (ICA, 1965-89) raised its price by 75% above the Cournotcompetitive level, annually transferring approximately $12 billion from consumers to exporting countries, and its lapse in 1989 explains fourfifths of the subsequent price decline, that is, the 'coffee crisis.'