MARKET POWER IN INTERNATIONAL COMMODITY TRADE:

THE CASE OF COFFEE

MITSURU IGAMI

February 26, 2014

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 coee bean market to assess the impact of a cartel treaty on coee
prices and its global welfare consequences. The results suggest the International Coee
Agreement (ICA, 196589) raised its price by 75% above the Cournot-competitive level,
annually transferring approximately $12 billion from consumers to exporting countries,
and its lapse in 1989 explains four-fifths of the subsequent price decline, that is, the
coee crisis.

I. INTRODUCTION
DESPITE ITS CAFFEINE CONTENT, coee can cause depression. Between 1988 and 2001,
the price of coee beans fell by 75% to an 89-year low of 50 cents per pound (see Figure
1),1 with exporting countries and producers around the globe suering the consequences.2
Historically, drops in commodity prices have caused numerous crises. Although the eects

For valuable suggestions, I thank the editor, Alan Sorensen, the three anonymous referees, Daniel Ackerberg, Andrew Ainslie, Andrew Bernard, John Campbell, Bruce Carlin, Harold Demsetz, Jerey Dubin, Sebastian Edwards, Eric Fisher, Paola Giuliano, Pinelopi Goldberg, Jinyong Hahn, Philip Haile, Hugo Hopenhayn,
Ari Kang, Lawrence Karp, Maki Komatsu, Edward Leamer, Giovanni Maggi, Rosa Matzkin, Ayako Obashi,
Jerey Perlo, John Riley, Peter Schott, Connan Snider, Raphael Thomadsen, Aaron Tornell, Sofia Berto
Villas-Boas, Romain Wacziarg, and Mark Wright, as well as the seminar participants at 2010 EITI, 2010
TADC, UC Berkeley, UCLA, and Yale. Financial support from the ITO Foundation, the Nozawa Fellowship,
and the UCLA CIBER are gratefully acknowledged.

Yale University, 37 Hillhouse Avenue, New Haven, Connecticut 06511, U.S.A. E-mail: mitsuru.igami@yale.edu
1
Spot price (Brazilian and Other Arabica) at the New York Board of Trade, adjusted by US-CPI to the
2007 constant U.S. dollar. The 89-year low refers to the period since the beginning of price data in 1913.
2
The coee crisis aected over 25 million farmers around the globe (Clark 2007, p.169). Between 1988
and 1994, real GDP grew by only 0.96% annually in countries where coee was the major export, whereas the
figure was 3.19% for non-coee exporters. The ensuing waves of sovereign debt cancellations cost taxpayers
over $162 billion in richer countries (total debt relief for 51 coee exporting countries, 19902007). The plight
of the coee industry fueled the intensifying violence in Colombia (Dube and Vargas 2009) and exacerbated
ethnic tensions in Rwanda, where coee accounted for 57% of all exports (Verwimp 2003).

of these crises are often documented, few studies have analyzed their causes.3 This paper
empirically investigates the causal mechanism of commodity price fluctuations.
(cents/lb)
400

300

200

100
Unadjusted Price
Adjusted for Weather Shocks
0
1960

1970

1980

1990

2000

Note: The prices are in the 2007 constant US dollar. The Adjusted price plots the residual from regressing the
original Unadjusted price on the weather shock variable, which is explained in section 3.
Source: Commodity Research Bureau (CRB), Bureau of Labor Statistics (BLS), United States Department of
Agriculture (USDA), and authors calculations.

Figure 1: Real Price of Coee Beans

International commodity markets determine the prices of basic inputs to our economies
such as food and energy. Their price fluctuations aect the well-being of consumers in
the importing countries as well as developing countries macroeconomic performance, which
typically depends on commodity export revenues. Little is known, however, about their price
determination mechanisms, aside from a few statistical properties of commodity price time
series (c.f., Deaton 1999, Deaton and Laroque 2003). The common belief is that commodity
prices are unpredictable, and, because commodity markets are often cited as a textbook
example of perfect competition, few analysts suspect market power as an explanation of
price movements.4 However, a closer look at the supply side and the institutional features of
these markets reveals the prevalence of cartels and oligopolies. For example, Slade and Thille
(2006) documented cartel arrangements in the base metals markets (aluminum, copper, lead,
nickel, tin, and zinc). Even when individual producers at the sub-national level are atomistic,
exporting institutions and international agreements often create a virtual oligopoly of several
nations at the international level, as Gilbert (1996) demonstrated in his historical assessment
of the international commodity agreements of cocoa, coee, rubber, sugar, and tin.5 To better
3

Researchers have investigated the welfare consequences of commodity price movements for national
economies (e.g., Catao and Sutton 2002) as well as rural households (e.g., Varangis et al 2003), but few
studies have analyzed the determinants of commodity prices.
4
Researchers tend to assume perfect competition, taking price fluctuations as random shocks (e.g.,
Akiyama and Varangis 1990, Mehta and Chavas 2008).
5
Other examples include OPEC, which controls a sizable proportion of the worlds crude oil exports.

understand the role of market power in commodity price fluctuations, this paper studies the
case of coee beans and shows changes in market power caused one of the largest commodity
crises in history, the coee crisis. Further, the paper shows changes in market power were
themselves the outcomes of international politics.
The purpose of this research is threefold: (1) to measure market power embodied by
the International Coee Agreement (ICA, 196589), an international cartel treaty; (2) to
evaluate its welfare impact on both exporting and importing countries; and (3) to assess
the extent to which the change in international trade regimes can explain the coee crisis
apart from other factors such as the emergence of a fringe exporter country (Vietnam) and
weather shocks (frosts in Brazil). I approach this empirical problem by exploiting historical
variations in the structure of the international coee bean market and estimating a standard
model of demand and oligopolistic competition. The results suggest the ICA raised prices
by 75% above the Cournot-competitive level that would have prevailed in the absence of the
cartel treaty, annually transferring approximately $12 billion from importing to exporting
countries, and its lapse in 1989 can explain four-fifths of the subsequent price decline, that
is, the coee crisis.
With trading volume second only to crude oil and 55 exporting countries, which account
for 42% of all developing countries and 59% of highly indebted poor countries (HIPCs), the
coee bean market represents a relevant economic context for investigating the causes of price
fluctuations, which policymakers need to understand in order to alleviate the consequences.
The coee bean market is therefore interesting and important in itself, but focusing on this
commodity has other merits. First, of all price movements within primary commodities, that
of the coee bean is one of the most sensitive to the economic fundamentals of short-run
supply and demand. By contrast, commodities such as crude oil and metals are storable
and require a decade-long technological extraction process that entails much uncertainty.
Second, the coee cartel was simple in that it was based on an export quota system. This
feature allowed my analysis to focus on price, cost, and export quantities. Other international commodity agreements, in contrast, often employ more complex rules such as buer
stock inventories, which would materially complicate the analysis without adding significant insight.6 Finally, some producing countries rely on coee beans for more than half of
their entire export revenues (e.g., El Salvador and Uganda). Hence the coee price could be
called their real exchange rate, fluctuations of which are tantamount to true macroeconomic
shocks. These features render the study of the coee bean industry particularly fruitful, in
terms of both analytical clarity and substantive interests.
The two common challenges for empirical studies of collusion and market power, such as
this paper, are the identification of changes in cooperative regimes and the identification of
market power apart from marginal costs. The institutional context of the coee bean market
ameliorates the first problem because, curiously, the government of the United States, the
largest importing country, oered crucial supports for the proper functioning of the explicit
De Beers exercised monopoly power over the diamond market to the extent that no open, public market
existed. Spar (1994) analyzes international cartels in the markets for diamonds, uranium, gold, and silver.
Stocking and Watkins (1946) document the prevalence of cartels in the markets of sugar, rubber, nitrogen,
steel, aluminum, magnesium, and various chemical products in the first half of the 20th century.
6
Deaton and Laroque (1992 and 1996) found that storage and speculative inventories did not appear to
explain important features of commodity prices.

cartel treaty among the exporting countries, and because U.S. foreign policy exhibited clear
changes in its attitude toward this international treaty, which the U.S. government used as
a tool of foreign aid to countries in the south, under an umbrella geopolitical strategy of
fight against communism. Thus, by focusing on an explicit cartel treaty and exploiting the
exogenous changes in the U.S. foreign policy regime, this paper departs from the traditional
focus on tacit collusion in the literature (e.g., Porter 1983, Bresnahan 1987, and Ellison 1994)
and shares the spirit of Asker (2010) in examining situations in which external evidence exists
on the internal functioning of cartels. In the context of international trade, this paper also
shares the emphasis of Bagwell and Staiger (2002) on country-level strategic interactions in
trade agreements.
I solve the second empirical challenge of estimating market power separately from
marginal costs by using data on the marginal costs of exporting coee beans (i.e., domestic
farm-gate prices in exporting countries), which, combined with the international commodity
price data, allow us to directly measure market power in the form of markup or Lerner index.
Hence my empirical strategy is closer to Genesove and Mullins (1998), who also observed
the marginal costs of processing sugar, than that of Bresnahan (1982), who proposed an
approach to estimate marginal costs and market power simultaneously.
I have organized the rest of the paper as follows. Section II summarizes the institutional
and historical background of the international coee bean market. Section III explains the
dataset and shows the preliminary data analysis. Section IV describes the model of the
coee export market. Section V reports the estimation results. Section VI presents welfare
analysis of the cartel treaty, and decomposition of the coee crisis. Section VII concludes.

II. THE INTERNATIONAL COFFEE BEAN MARKET

This section provides the institutional background of the international coee bean market.
First I describe the profiles of coee importers and exporters, as well as product characteristics. Then I explain the historical context of the cartel treaty and fringe competitor,
which is crucial for understanding the geopolitical nature of the changes in market structure.
Specifically, I argue that both the rise and fall of the international cartel agreement, as well
as the expansion of Vietnamese exports, were out-of-the-blue shocks to the export market,
thus providing the econometrician with rich exogenous variations in data. The variations
were direct reflections of U.S. foreign policies and Vietnams rural development projects.
Americans drink, on average, 1.76 cups of coee a day, whereas Europeans down 2.04
cups. Even the green-tea-loving Japanese enjoy 1.42 cups of coee.7 Together, the capitalist
first world imported over 90% of the global coee bean harvest in the sample period (1960
2006). Most of these countries (except for New Zealand and Israel) were importing members
of the ICA. Their customs ocials ensured shipping carried the ICAs stamp of approval,
thereby monitoring and enforcing the exporters quota allocation. In essence, the ICA was
a form of development assistance from the first world (see section II(ii) for details).
7

Calculation based on the International Coee Organizations 2005 survey. I follow Americas National
Coee Association to equate an annual consumption of 1 kilogram with 0.42 cup per day (6.5 grams per
cup).

The socialist second world, or non-member market, imported approximately 5% of

all coee beans. This market was composed of fringe buyers and formed the unregulated
black market. Transactions in this market were not systematically recorded, but evidence
suggests black-market prices were 30% to 40% lower than in the regulated market. This price
level was roughly equal to the domestic farm-gate/wholesale prices in exporting countries.
This finding implies marginal cost pricing by exporting countries, which is not surprising,
because they customarily dumped excess harvest (supply above quota) to the socialist bloc.
Thus the second world played the role of the buyer of last resort, or a safety valve, for the
third-world farmers.
To satisfy these peoples in the North, the South exports over $10 billion worth (or 80
million 60kg bags) of green coee beans every year. Coee cultivation requires tropical highlands, thereby determining the producing regions. No significant entry or exit has occurred
since the 1960s, aside from the rise of Vietnam. Fifty-five countries across Africa, Asia, and
Latin America, with many small farms within each nation, export coee beans.
Government bodies in these countries, such as national coee marketing boards, regulated the industry and worked as a domestic planning/coordination agency. Because the
international cartel agreement (an export quota system) worked at the supra-national level,
my analysis focuses on nation states as the export decision makers, and particularly on their
collective behavior in the global market.
Green beans (coees raw material form before roasting, grinding, and brewing) are
commonly classified into the following four categories in the worlds commodity exchanges:
Colombian Mild Arabica, Other Mild Arabica, Brazilian Natural Arabica, and Robusta, but
the cartels operation was based on the single indicator price (the weighted average of the
four dierent coee prices). Thus, to maintain consistency with the cartels practice and
to focus on the measurement of its market power, I followed previous studies (Karp and
Perlo 1993, Nakamura and Zerom 2010) in characterizing green coee beans traded on
international commodity exchanges as homogeneous goods.
The ICA was kept in place between 1965 and 1989 for the purpose of maintaining high coffee prices. Its primary mechanism was export quotas, which were allocated across countries
in proportion to their historical market share.8 These quotas were then revised up or down
across the board in response to the movements of the indicator price. The decision-making
at the International Coee Organization (ICO), the ICAs administrative body, relied on
voting by both the exporting and importing member countries. All major decisions required
a two-thirds majority. The votes were also allocated proportional to countries trade shares,
so the largest exporters (notably Brazil and Colombia) as well as the United States held veto
power.
Despite some shortfalls, the ICA was widely considered one of the most successful commodity agreements in history. Cooperation among producers remained problematic, but
the crucial support came from the importing members in the form of the monitoring and
enforcement of quotas. The fact that the United States used its other aid programs to oer
inducements and sanctions also helped. As Bates (1997) documents, The U.S. government
was intensely aware that the success of its broader development assistance programs in Latin
8

See Bates (1997), ch. 6 for the details of the ICAs functioning.

America would be strongly aected by the success of the International Coee Agreement.
(p.146)
But the honeymoon between the first and third worlds ended abruptly in 1989, when the
second world imploded. The collapse of its Cold War enemy, and with it the rationale for
hurting American consumers through high prices under the ICA, led the United States to
withdraw its support. The ICA ended on July 4, 1989.9 Without American policing, none
of the subsequent resuscitation eorts proved fruitful, which reinforces our view of the ICA
as an American foreign policy instrument.
The growth of Vietnams coee bean production was primarily driven by the geographical
expansion of Doi Moi policies, on the back of foreign aid and large-scale ethnic migration
schemes. These policies, in turn, stemmed from the geopolitical concerns of the post-war
central planners. Such historical developments do not necessarily preclude the importance
of economic incentives. Certainly, the goal of Doi Moi was the gradual transition from
central planning to a market-based economy. The planners promoted coee because Vietnam
could produce it cheaply for profitable export. For the purpose of subsequent econometric
analyses, however, the crucial aspect of Vietnams modern history is that the growth of
coee production occurred for those idiosyncratic reasons in a series of five-year plans, and
mostly in isolation from the year-to-year price fluctuations in the global market.10 By the
late 1990s, Vietnam had dethroned Colombia as the worlds second-largest exporter (with
Brazil still the largest), putting further downward pressure on the price of coee beans. The
overall process of production growth would be best characterized as a (rare) success story of
a developmental big push.
In summary, the international coee bean market consists of the developed countries
(as importers) and developing countries (as exporters). The latter enjoyed market power
under the ICA (196589), the rise and fall of which were driven by the U.S. governments
Cold War concerns. The socialist bloc played the role of fringe importers, representing a
small, unregulated market for exporters. The breakdown of the coee cartel coincided with
the emergence of Vietnam as a fringe exporter urged along by foreign aid, government-led
migration, and market-oriented reforms. Thus both the cartels breakdown and Vietnams
expanded exportation represent changes in market structure that are exogenous to the yearby-year price fluctuations in the global market. See Appendix A for further institutional
details.

III. DATA
This section describes the dataset. In Appendix B, I report the preliminary data analysis,
regressing the coee price on changes in the market structure (i.e., the cartels breakdown
9

During the late 1980s, Secretary of State George Shultz demanded all international commodity treaties
be reviewed by the State Departments Division of Economic Aairs, staed with economists from Chicago,
who subsequently recommended the withdrawal from these treaties. See Bates (1997, ch.7) and Clark (2007,
ch.6) for the details of this political process.
10
The Vietnamese government had not entered coee trade negotiations before reaching its geographical
limit of production in 2001. Vietnam finally became a member of the International Coee Organization
(ICO) on May 7, 2002, and of the World Trade Organization on January 11, 2007.

and the emergence of the new exporter, Vietnam).

The dataset spans the period 19602006 and contains the measures of prices, costs,
exports, changes in market structure, and three other variables for instrumentation and
control, at the monthly frequency with a few exceptions (annual). Table 1 displays their
summary statistics.
TABLE 1: SUMMARY STATISTICS
Variable
Price (Pt )
Cost (mc(t )

Markup mt

Pt mct
Pt

World Export (Q
(t) )
of which Cartel Q(C
t
)
of which Vietnam qtV
ICA lapse (It )
Weather Shocks (Wt )
Buyers GDP (Xt )
Tea Price (Zt )

Unit of Measurement
US cents
US cents

Num. Obs.
576
360

Mean
242
127

Std. Dev.
148
60

Min
44
41

Max
1131
283

360

0.29

0.32

0.97

0.75

Million 60kg bags

Million 60kg bags
Million 60kg bags
0/1 indicator
Set of 0/1 indicators
Log of trillion US dollars
US cents

576
576
576
576
576
576
576

5.472
5.187
0.285
.39

0.19
484

1.173
0.840
0.456
.49

0.44
246

3.473
3.470
0.002
0
0
0.71
189

7.859
6.592
1.558
1
1
0.84
1435

Note: Prices and GDP are expressed in the 2007 constant U.S. dollars. All variables are recorded at the monthly
frequency between January 1960 and December 2006 except for Cost, Export quantities, and GDP, which are
recorded annually and converted to monthly figures. Cost data (hence markup, too) are available only for 30
years.
Source: Commodity Research Bureau (CRB) for the prices of coee and tea, United States Department of
Agriculture (USDA) for the export quantities, International Coee Organization (ICO) for the farm-gate prices
(measures of Cost), and International Monetary Fund (IMF) for the importing countries GDP. The Markup,
Cartel Breakdown, and Weather Shocks are constructed by the author.

First, I observe both the international coee bean price (the benchmark price index
calculated by the ICO based on the spot prices in NYBOT)11 and the exporting countries
domestic farm-gate prices (the prices the growers receive in these countries).12 Because the
latter reflect what exporters/governments pay the coee growers, it represents the marginal
11

The ICO collects ex-dock prices, which include costs of transport and unloading from vessel at port
of discharge. When such prices are unavailable, the ICOs agents adjust FOB (i.e., pre-shipping) or CIF
(i.e., post-shipping) prices to emulate ex-dock rates. Coee beans are carried by either dry-bulk or container
ships. Their freight rates are known to fluctuate over time, as reflected in the movements of Baltic Dry Index
(BDI, for dry-bulk ships) and HARPEX (for container ships), partly because they include Bunker fuel costs,
which co-move with crude oil prices. As a result, our measure of selling prices contains some noise, but I
chose to use this series without further adjustment for three reasons. First, both BDI and HARPEX date
back to the mid-1980s at most, so we cannot use them for over half of our sample period. Second, shipping
costs represent only a small fraction of the coee price (5.4% according to Yeats 1995, p.24, Table 8), and
hence are unlikely to alter our conclusions about the 70% decline of the latter. Third, BDI moved within
a relatively narrow range during the 1980s and 1990s and then rose sharply between 2000 and 2008; hence
this upward trend seems unlikely to have caused a downward shift in the coee price.
12
I use the market-share-weighted average of the farm-gate prices across countries, but all of the subsequent
results are robust to other aggregation rules such as simple averaging or using only the top producers such
as Brazil and Colombia. Ideally, mct should reflect all exporting countries cost curves, but the actual record
exists for only 17 (out of 55) countries on a continual basis. Fortunately, the record contains most of the

cost of exporting.13 Studies on the international black market (see section II) suggest the
prevailing price in that unregulated, perfectly competitive market equals those farm-gate
prices in exporting countries. This is yet another way in which the farm-gate price ( the
black-market price) reflects the opportunity cost (marginal cost) for a country to export to
the ICA-member (i.e., regulated) market. Given these data, I was able to measure exporters
t
market power by markup (price-cost margin, or the Lerner index): mt Pt mc
.
Pt
Second, I examined the exports of coee by country. Three quantities are particularly
important for the subsequent analyses: world exports, cartel members collective exports, and
V
V
Vietnams export (denoted by Qt , QC
t , and qt , respectively). This qt reflects the sudden
acceleration of the Vietnamese production, a government-led big push (see section II(iii) for
the institutional background). Together with qtV , the ICA lapse dummy (which equals zero
before July 1989 and one since then) represents the shift in the U.S. foreign policy regime
toward the end of the Cold War, and the change in market power induced by the ICAs lapse
(see section II(ii) for details).
Another important variable is weather shocks, Wt , because weather-driven quantity
shocks are the archetypical driving forces for models of agricultural prices.14 In the spirit of
Rolls (1984) analysis of orange juice and weather, I use weather shocks as an instrument for
the price in demand estimation (see section V). The trade publication The CRB Commodity
Yearbook contains news on events that influence commodity prices, from which I collected
the record of major frosts and droughts in producing countries, most importantly Brazil, as
well as Central America, East Africa, and South East Asia. These records were then crosschecked with the ICOs record of major frosts and droughts. Because damaged coee trees
usually take two years to recover, I coded each of the 24 months (since each of the weather
shocks) as a time dummy variable.15 When multiple shocks overlap within 24 months of
each others occurrence, I code the second and (at most) third shocks in separate sets of
time dummies because each additional shock aects price at least as much as the first one.
Other shocks on the demand side will serve as control variables. Rich countries aggregate
real GDP, Xt , embodies both population and per-capita income of the importing countries.
Because the world coee demand grew roughly proportional to the size of population, this
variable eectively detrends the demand. Finally, the real price of tea, Zt , would control
for a potential substitution of tea for coee. The inclusion of these variables is informed by
Karp and Perlos (1993) and Nakamura and Zeroms (2010) studies of coee demand.
Because mct , Xt , and export quantities are recorded only at the annual frequency, I
convert them into monthly series by repeating each years observation (or a twelfth of it)
important exporters, as well as smaller players of diverse regions, with the combined total market share of
66%.
13
I abstract from political economy at the sub-national level, because this papers main subject is international competition/cooperation and market power. At least three models of an exporting countrys domestic
economy can support this interpretation: (1) the domestic wholesale coee bean market is competitive; (2)
the government/exporter acts as a benevolent social planner for the entire domestic economy; and/or (3)
the government/exporter acts as the representative of the coee producers by first paying them the marginal
cost of production and then transferring the export surplus to the producers as well. See Bohman, Jarvis,
and Barichello (1996) for the details of these models of exporting countries domestic market structure.
14
Deaton and Laroque (2003, p.290).
15
The estimation results are robust to changes in the way I code the weather variable, including dierent
treatments of the instances of multiple frost/drought shocks.

for 12 months. This conversion would create a potential measurement error problem in
regressions, which I will address with the monthly series of weather IVs in section V.

IV. MODEL
The preliminary regressions in Appendix B suggest the likely price impacts of ICA, the cartel
treaty, and the emergence of Vietnam (a fringe exporter). In this section, I proceed to develop
an estimable model of the international coee bean market for three reasons. First, a large
body of economic theory is relevant to the analysis of commodity price determination (i.e.,
models of agricultural commodity demand and imperfect competition in homogeneous goods
markets), which, combined with the institutional knowledge of the coee market, would
clarify our thoughts about how prices and quantities would respond to demand, weather
shocks, Vietnams exports, and the cartels market power. Second, an oligopoly model
would facilitate our intuitive interpretation of, and hypothesis testing about, the cartels
market power. Third, public policies and economic events of this magnitude (i.e., ICA and
coee crisis) should be assessed quantitatively to inform policy design in the future. Welfare
analysis requires a model of demand, and the construction of benchmark counterfactuals
further necessitates supply-side modeling. Thus some structure and assumptions are needed
to analyze price elasticity of demand, the cartels market power, and welfare impacts.

IV(i). Demand and the Timing of the Game

World demand, Qt = f (Pt , Xt , Zt , t ), determines the relationship between world exports,
Qt , and price, Pt . Its empirical specifications in section V(i) will also incorporate Xt (the level
of world income), as is standard in the analysis of commodities (c.f., Deaton and Laroque
2003), as well as Zt (tea price) and t (unobserved variation in consumers preferences), but
I suppress these notations in this section. Let P (Qt ) represent the inverse demand function.
Vietnam is a new, fringe exporter. To consistently measure the coordination among all of the
other exporters (the cartel treaty members), one should subtract Vietnamese exports from
global demand to calculate the net demand curve that cartel exporters face. More formally,
the setup is as follows:
1. Every month t, the world demands coee beans. The (inverse) demand schedule,
P (Qt ), is common knowledge. The aggregate supply, Qt , consists of the Vietnamese
export qtV and those from the other 54 countries collectively called the cartel QC
t :
.
Qt = qtV + QC
t
2. The new, fringe producer, Vietnam, exports its entire harvest, qtV . This qtV is the
result of government-led ethnic migration, the Doi Moi policy, and foreign aid, and
was therefore determined independently (see section II and Appendix A for details).16
16

In principle, Vietnam can be alternatively modeled as a strategic first mover (i.e., qtV depends on P (Qt )
and QC
t ), although this assumption would be inconsistent with the historical facts. The final results do
not change significantly even under this alternative assumption. I have chosen the baseline assumption of
nonstrategic Vietnam because of the countrys unique institutional context and because I can then maintain
the time-consistent interpretation of the cartels market power over time.

3. Given P (Qt ) and qtV , that is, given the demand curve net of fringe supply, the 54 cartel
members decide their collective exports, QC
t . This choice of quantity is described below.
Thus, the framework contains the first and the second movers, but the first mover (Vietnam) represents a geopolitical shock rather than an active, strategic player as in the Stackelberg game. The setup also has a Cournot component in the sense that the second mover
is not a single decision maker but a collection of export quantity-setting competitors, whose
coordination may not be perfect in practice.

IV(ii). Exporting Countries as Cournot Competitors

We do not need an oligopoly model to estimate the cartels market power because we can
directly measure it by observing markup in data. However, a simple Cournot model will still
be useful as a benchmark to facilitate our interpretation, hypothesis testing, and counterfactual analyses. Consider a Cournot model with N countries shipping coee beans. Country
i in month t chooses export, qit , to maximize its profit:
(
)
V
it = P QC
,
q
qit C (qit , Wit ) ,
(1)
t
t
C
where P () is the inverse
demand function, Qt is the sum of exports from all countries
excluding Vietnam (i.e., i6=V qit ), and C () is the cost function. The cost shifter Wit aects
the marginal cost mcit = C (qit , Wit ) /qit . The first-order condition of country is profit
maximization is
P
Pt +
qit = mcit .
(2)
Q

V. ESTIMATION AND RESULTS

The goal of this section is to estimate the structural model of the previous section. I will first
present the demand estimates for coee beans, which, together with the observed (or estimated) markup, mt , will be useful for the subsequent counterfactual simulations to quantify
the welfare impact of the ICA.

V(i). Demand Estimation with Weather IV

Demand estimation provides the basis for the subsequent welfare analyses. Table 2 shows
the estimates based on the following linear form:
Qt = 0 + 1 Pt + 2 Xt + 3 Zt + t ,

(3)

where Qt is the quantity demanded, Pt is the world price, Xt is the demand shifter (the
importing countries GDP, i.e., buyers population times income per capita), Zt is the price
of tea leaves,17 and t is the unobserved shock that represents variation in consumers preferences over time due to local temperature (e.g., a colder winter induces more coee drinking),
17

Although these control variables are not explicitly modeled in the previous section, their inclusion is
informed by the existing research. Structural interpretations of the tea price may not be straightforward,
because, even though I assume its exogeneity for reasons I discuss shortly, its inclusion may seem to assume

10

changing mixture of alternative beverages, and other random factors from the econometricians perspective. This specification follows Karp and Perlos (1993) earlier study on
coee demand, and the results also are comparable to their work. Because Pt is originally
recorded at the monthly frequency, whereas Qt (and Xt ) is not, the actual estimation uses
the following inverse demand function:
P =

1
[Qt (0 + 2 Xt + 3 Zt + t )] .
1

(4)

TABLE 2: ESTIMATES OF WORLD COFFEE BEAN DEMAND

Dep. var.: Pt (Coee Price)
Qt (Coee Exports)

[1]
75.6
(14.2)

Xt (Buyers GDP)

OLS
[2]
200.6
(57.4)
357.2
(141.4)

Zt (Tea Price)
Constant
R2
Number of observations

656
(90)
.36
576

1271
(296)
.50
576

[3]
194.4
(32.7)
616.6
(111.7)
.5484
(.1225)
922
(164)
.67
576

[4]
284.1
(79.7)

1797
(425)

576

IV
[5]
329.7
(73.0)
679.9
(183.6)
1915
(369)
.37
576

[6]
292.7
(36.9)
854.7
(85.6)
.5329
(.0908)
1422
(212)
.59
576

Note: The IV estimation uses weather shocks as the instruments for Coee Exports. Column [4] does not
report R-squared, because it is negative. ***, **, and * indicate significance at the 0.1%, 1%, and 5% levels,
respectively. Standard errors are in parentheses (clustered by calendar year).

In Table 2, columns [1], [2], and [3] present the OLS estimates. In columns [4], [5], and
[6], I used weather, Wt , as an instrumental variable (IV) for the export quantity, Qt , to
address the potential simultaneity bias (i.e., the price could be high partially due to some
positive demand shocks) and measurement error (i.e., export quantities are recorded only
annually). Standard errors are clustered by year to account for the varied data frequency,
and the use of heteroskedasticity- and autocorrelation-consistent standard errors does not
alter the statistical significance of estimates. The results look reasonable with negative pricequantity relationships and positive coecients on both the buyers GDP and the tea price.
In what follows, I will use [6] as the baseline result because the use of IV is preferable to
OLS in the presence of potential simultaneity bias and measurement error, and because it
tea and coee are substitutes for each other. Hence a tension exists between conceptual clarity and the need
to incorporate empirically relevant variables.
Structural modeling of the tea market is beyond the scope of this paper, and I believe the tea price is
suciently exogenous to the developments in the coee market for four reasons: (1) producing countries
are dierent (e.g., Argentina, China, India, Iran, Japan, Sri Lanka, Turkey, Georgia, and Azerbaijan), and
some of them produce exclusively for domestic consumption because tea is more dierentiated than coee;
(2) importing countries are dierent (e.g., the U.K., Russia, Iraq, Saudi Arabia, Syria, and Egypt); (3) the
United States imports only about 5% of global production, and over 80% of tea is consumed as iced tea in
America, hence the scope for substitution with coee, which is more often served hot, is limited; and (4)
unlike the coee trade, the international trade of tea is competitive except for the brief period during the
Great Depression (i.e., outside my sample period). See Gupta (2001) for details.

11

employs a full set of controls. In Appendix C, I report the first-stage regressions, as well as
similar results of demand estimation based on the annualized data frequency and log-linear
specifications.
Because the price (quantity) coecient, 1 , will be the key input for all of the subsequent
analyses, it deserves closer attention. First, compared with the OLS estimates, the IV
estimates are more stable and pronounced in magnitude, which is an intuitive result because
we would expect the weather IV to isolate both the unobserved demand-side shocks and the
noises due to measurement error. Second, although the inclusion of the tea price reflects a
compromise between conceptual cleanliness and practicality, finding similar 1 in columns
[5] and [6], that is, with and without the tea price, is reassuring. Third, the 1 in column [6]
(preferred specification) implies the price elasticity of 0.15 at the mean price and quantity.
The existing research also reported rather low estimates around 0.2.18 This inelastic demand
estimate, confronted by weather-driven supply shocks, agrees with the standard explanation
for the variability of commodity prices (Deaton and Laroquue 1992, Prebisch 1959, Singer
1950).
Thus, I see desirable features in these demand estimates, which will in turn facilitate
our market-power interpretation of observed markups (Appendix D) and enable us to assess
the welfare impact of the cartel treaty (section VI). The subsequent analyses will focus
exclusively on the supply-side explanations of the price decline, but a plausible alternative
hypothesis would come from the demand side as well. In Appendix C, I will discuss other
possible explanations and report additional demand estimation results, which suggest only
the supply-side mechanisms can explain the price decline.

V(ii). Country-specific Marginal Costs

Combined with the estimated demand function, the first-order conditions (equation 2) allow
us to estimate the country-specific marginal costs of export. Specifically, I assume Cournot
competition in each year after 1989 and interpret the time-average of mc
dit during 19902006
as country is constant marginal cost (see Appendix D for cross-validation of the Cournot
assumption based on the direct measures of cost and markup). We can use these cost
estimates to compute hypothetical Cournot prices before 1989 as a no-cartel counterfactual
(section VI(i)).
Figure 2 summarizes the marginal cost estimates over time and across countries (left
panel), and compares them with the farmgate prices (right panel). Three patterns emerge.
First, the levels of these indirect and direct cost measures broadly agree with each other,
with the exception of the two spikes in the 1990s due to severe weather shocks. Second,
the time-series trajectories of the estimates seem more volatile than the data, because the
former reflects any changes in export quantities by construction. But more importantly,
the fluctuations appear stationary and lack any clear time trends. I chose to take the timeaverage of mc
dit for these reasons. Third, the cross-country dierences appear consistent with
anecdotal evidence about the countries cost structures. For example, Brazil and Vietnam
exhibit lower costs than others (see section VI(iii) for further discussions on country-specific
changes).
18

See Bates (1997, Appendix) for a summary of the previous estimates for price-sensitivity.

12

(cents/lb)

(cents/lb)

Marginal Cost Estimates

500

Observed Farmgate Prices

500
75 percentile

75 percentile

50 percentile

50 percentile

25 percentile

400

25 percentile

400

300

300

200

200

100

100

0
1990

1995

2000

2005

1990

1995

2000

2005

Note: The figure compares the estimated (left) and observed (right) measures of marginal costs, by plotting
those of the countries at specific quartiles based on the 19902006 average.

Figure 2: Summary of Marginal Cost Estimates

VI. WELFARE ANALYSIS OF THE COFFEE CARTEL

In this section, we seek to understand the economic significance of the market power due to
the cartel treaty (ICA) by using counterfactual simulations to quantify its welfare impacts.
See Appendix D for its statistical significance.

VI(i). Market Power as Foreign Aid: Wealth Transfer under the ICA (1979
1988)
Based on the estimated world demand and the country-specific costs, as well as the assumption of Cournot competition in the export market, we can calculate the pre-July 1989
counterfactual prices and quantities that would have prevailed had the cartel agreement
never materialized (i.e., if the United States had not participated in the ICA). Table 3 compares the actual (column [A]) and counterfactual (column [B]) prices, exports, consumer
surplus, producer surplus, and social welfare, and displays their dierences (column [C]).
This simulation will provide us with the benchmark economic outcomes against which to
measure the welfare impact of the cartel treaty.
Without ICA, the coee price would have been lower by 134.2 cents at 179.6 cents, and
the world exports higher by 6 million bags at 70 million bags.19 As a result of the ICA, the
worlds consumers gave up $11.8 billion every year,20 most of which was transferred to the
producing countries ($11.2 billion).
To put these numbers in context, we can compare them with the amount of foreign aid.
Specifically, the annual Ocial Development Assistance (ODA) averaged at $64.9 billion (in
2007 constant U.S. dollars, for the comparable period 197988), of which $14.8 billion came
from the United States, followed by Japan ($9.3 billion), France ($7.8 billion), Germany
19
I assume this 9% change in export does not alter the underlying cost structure. Specifically, my assumption of constant marginal cost relies on engineering estimates, which suggest simply varying the intensity of
fertilizer use can change harvest quantity in the order of 1030% (Giovanucci et al 2004).
20
The burden on American consumers was approximately $3.4 billion, based on the fact that the United
States imported 29% of the world coee exports (197988 average).

13

TABLE 3: WELFARE ANALYSIS OF THE INTERNATIONAL COFFEE AGREEMENT

Annualized 197988 average
(1) Price (cents/lb)

[A] Actual
(with Cartel)
313.8

(2) World Exports (million bags)

64.0

(3) Consumer Surplus (million $)

65, 472

(4) Producer Surplus (million $)

12, 937

(5) Social Welfare = (3) + (4)

78, 409

[B] Counterfactual
(without Cartel)
179.6
[169.8, 189.4]
69.6
[70.0, 69.2]
77, 298
[78199, 76404]
1, 707
[810, 2594]
79, 006
[79010, 78997]

[C] Dierence
([A] [B])
134.2
[144.0, 124.4]
5.5
[5.9, 5.1]
11, 827
[12727, 10932]
11, 230
[12126, 10343]
597
[601, 589]

Note: The 95% confidence intervals are in brackets (based on those of the demand estimates). Prices
and surpluses are expressed in the 2007 constant U.S. dollars.

($7.3 billion), and the U.K. ($4.1 billion). Hence the eective wealth transfer of $11.8 billion
under the ICA mechanism amounted to as much as 18% of the worlds total ODA, or about
as much as American ODA. Although treaties such as ICA are not ocially counted as
foreign aid, my estimates suggest they might have sizeable impacts in developing countries,
nearly half of which export coee beans.
These welfare estimates rely on my modeling assumptions and estimates of the primitives
in sections IV and V, including: (1) estimated demand, (2) estimated country-specific costs,
and (3) Cournot competition in 19892006. As a means of cross-validation, my baseline
structural estimates of the ICAs price impact (134.2 cents) roughly agrees with the reducedform estimates (between 138.1 and 161.6 cents) in Appendix B. Moreover, similar estimates
(131.7 cents) arise from an alternative empirical approach using the direct measure of costs
and markups, as well as the assumption of symmetry across countries, in Appendix D.
These three results seem to indicate the robustness of the papers main finding that the
ICA raised coee prices by 75% above the Cournot-competitive level, annually transferring
approximately $12 billion from consumers to exporting countries.

VI(ii). Decomposing the Coee Crisis (19892001)

The preceding welfare analysis focused on the cartel period using the no-cartel counterfactual. We can also simulate the post-cartel evolution of coee price under hypothetical market
structures (with/without the ICA and with/without Vietnams exports), if we are willing to
further assume symmetry across countries and exploit the direct measure of marginal costs
(see Appendix D for details).21 The goal is to quantify the likely price impacts of the cartels breakdown and the emergence of Vietnam circa 2001, that is, the decomposition of the
coee crisis. Specifically, I parameterize the (hypothetical) continuation of the ICA after
21

As a means of cross-validation, I find both the heterogeneous- and symmetric-country approaches generated rather similar 197988 counterfactual prices (179.6 and 182.1 cents, respectively).

14

1989 by the elasticity-adjusted Lerner index, and the (hypothetical) absence of Vietnam by
setting the fringe supply qtV = 0 t with the timing assumptions specified in section IV(i).
(cents/lb)
600
Scenario 1 (Cartel: yes, Vietnam: no)
Scenario 2 (Cartel: yes, Vietnam: yes)
Scenario 3 (Cartel: no, Vietnam: no)

500

Actual (Cartel: no, Vietnam: yes)

Actual (data)
400

300

200

100

0
1979

1984

1989

1994

1999

2004

Note: Scenario 1 is the most profitable case for the coee exporters based on (1) the traditional exporters
maintaining the market power under ICA even after July 1989, and (2) zero exports leaving Vietnam in all
years. Scenario 2 assumes only (1). Scenario 3 assumes only (2). The Actual case witnessed both the lapse of
ICA and Vietnams export expansion.

Figure 3: Counterfactual Prices

Figure 3 displays the simulation results, suggesting both the cartels breakdown and the
increased exports from Vietnam had visible eects on the coee bean price. Let us carefully
examine each factor. First, the actual prices in 1988 and 2001 were 211.9 and 64.2 cents
(annual average), respectively, hence a 69.7% drop. Second, the counterfactual 2001 price
would have been 199.9 cents,22 at a level 135.7 cents higher than the actual price, had the
ICA continued to function (Scenario 2 in Figure 3). Third, if we further hypothesize that
Vietnam had never expanded its coee sector (Scenario 1 in Figure 3), the 2001 price would
have been 227.0 cents, representing an additional increase of 27.1 cents. These results suggest
the coee price in 2001 could have stayed near the 1988 level if the market structure had not
changed so drastically. The exact proportions of price decline that are attributable to these
two eects partially depend on the order of comparison across multiple scenarios, but the
overall picture is clear: the lapse of the ICA explains at least four-fifths of the price decline
during the 1990s, with Vietnam contributing some additional fraction.23
Also note these quantification results based on our structural modeling and estimation
broadly agree with the reduced-form estimates (Appendix B). The results from these two
approaches are comparable in this study presumably because both rely on the same sources of
22

The 95% confidence interval is [193.3, 206.6]

I view my estimate of Vietnams price impact as an upper bound because the Vietnamese coee actually
consists of robusta (low-quality) variety and is therefore a less-than-perfect substitute for the other countries
arabica (high-quality) exports. By assuming homogeneity of coee beans across countries, my model is
biasing the estimates against my finding of limited Vietnam eects (and correspondingly bigger cartel eects).
23

15

exogenous variation in market structure (i.e., the U.S. foreign policy toward the commodity
trade and the government-led coee development in Vietnam). The additional leverage we
earned from the structural estimation was the intuitive measurement of market power under
the cartel treaty and the policy evaluation based on welfare analysis.

VI(iii). Market Share Reallocation After the ICA

In this section, I investigate the patterns of market share changes after the end of the ICA at
the country level with the following motivation. Empirical studies in international trade such
as Roberts et al. (2011) and Khandelwal et al. (2012) have demonstrated trade liberalization
often confers additional eciency gains through the channel of market share reallocation
across individual exporters (i.e., exporting countries in the present case). Because the ICA
was essentially a form of international trade agreement concerning export quotas to restrict
free trade of coee beans, its lapse in 1989 is tantamount to multilateral trade liberalization.
Therefore the question of whether export market shares changes across countries and whether
their pattern suggests further eciency gains via reallocation to low-cost countries would be
interesting.24
Table 5 lists the top-five winners and losers of market shares among the ICA member
countries, in terms of the changes between the 197988 (i.e., the decade prior to the 1989
lapse of the ICA) and 19992007 (i.e., after a decade since 1989) averages. I have chosen to
compare these two periods because, given that coee trees need four or five years to become
productive, we should probably allow a decade for exporting counties to fully adjust their
production capacities after the end of the quota arrangement in 1989.
TABLE 4: POST-CARTEL MARKET SHARE CHANGE BY COUNTRY
Country

Top 5
Brazil
India
Peru
Honduras
Guatemala
Bottom 5
Colombia
Cote dIvoire
El Salvador
Congo, D.R.
Cameroon

Region

19791988 Average
Exports
Share
Cost
(mn bag)
(%)
(cent/lb)

19992007 Average
Exports
Share
Cost
(mn bag)
(%)
(cent/lb)

Share
Change
(% point)

S. America
S. Asia
S. America
C. America
C. America

16.4
1.4
0.9
1.2
2.3

24.9
2.1
1.4
1.8
3.5

67.6
83.9
137.3
81.4
103.8

25.1
3.6
2.8
2.6
3.9

32.7
4.6
3.6
3.4
5.0

64.4
44.6
n.a.
57.8
71.3

7.8
2.6
2.2
1.6
1.5

S. America
W. Africa
C. America
W. Africa
W. Africa

10.2
4.0
2.6
1.3
1.6

15.6
6.1
3.9
1.9
2.4

76.6
n.a.
71.2
n.a.
n.a.

10.3
3.1
1.5
0.2
0.9

13.4
4.0
2.0
0.3
1.1

73.3
n.a.
46.2
n.a.
n.a.

2.1
2.0
1.9
1.7
1.3

Note: Share is the market share within the cartel (excluding Vietnam). Cost is the countrys domestic farm-gate
price in 2007 constant U.S. dollars. n.a. indicates missing records.

24

This section uses the observed domestic farm-gate prices as the direct measure of country-specific costs,
rather than my estimates from section 5.2, because the estimation approach for the latter assumes some
monotonic relationship between costs and market shares, which precludes further empirical investigations.

16

The biggest winner is Brazil, which increased its (within-cartel) market share by 7.8 percentage points, from 24.9% to 32.7%, whereas Colombia lost the most, with its share dropping
from 15.6% to 13.4%. We can explain this contrast between the two largest exporters from
South America by their cost dierence. Brazil is consistently a low-cost producer, with its
domestic farm-gate price below 70 cents/lb, whereas the cost in Colombia is above that
level. Brazil also may have been restricting its production and exports from its full-capacity
potential during the cartel period disproportionately more than Colombia and other cartel
members. As the largest exporting country, Brazil had the highest stake in sustaining the
ICAs collective market power, and hence presumably the highest willingness to pay the
cost of coordination (e.g., by giving out some extra quota allocation to disgruntled small
countries). That is, Brazil might have been to the coee cartel what Saudi Arabia is to the
crude oil cartel.25
Another piece of suggestive evidence is that only two out of the former top-ten exporters
(ranked by the 197988 shares) increased their shares after the lapse of the ICA: Brazil
and Guatemala. By contrast, major winners in the post-cartel trade (aside from Brazil and
Guatemala) were among those ranked somewhere between 10 and 20, including India (ranked
13th, 2.6% point gain), Peru (ranked 17th, 2.2% point gain), Honduras (ranked 16th, 1.6%
point gain), and Ethiopia (ranked 14th, 0.8% point gain). I interpret these tendencies as
indicative of some sort of political or institutional rents embodied in quotas, which accrued
to the top-share countries under the cartel regime, and which may have distorted the market
share allocation from the ecient one.
The other countries market share changes are more dicult to rationalize because some
(seemingly) high-cost exporters such as Peru and Guatemala are among the winners. In fact,
when I explored the correlation between the countries market share changes and their export
costs, no clear patterns emerged. My view is that except for a few important exporters for
which the data are relatively clean, such as Brazil and Colombia, the measures of export
costs (i.e., domestic farm-gate prices) could be quite noisy possibly due to the volatility of the
currency exchange rates for smaller countries and/or their governments limited capability
in data collection (e.g., the Democratic Republic of Congo).
These data quality issues limit our scope of inference regarding small countries. Nevertheless, the diverging fates of Brazil (a low-cost winner) and Colombia (a high-cost loser),
the countries with better data quality, seems suggestive of eciency gains from share reallocation. In terms of the overall quantitative impact, Brazils 53% export growth alone is
probably big enough to generate eciency gains from share reallocation.

VII. CONCLUSION
This paper aims to advance the analysis of international commodity markets based on economic fundamentals. Three findings emerge. First, the International Coee Agreement
25

My no-cartel counterfactual (section 6.1) suggests Brazil was better o supporting the ICA, because its
profits would have been 28% lower without the cartel treaty. To be precise, even though Brazil could have
increased its export quantity by 31% (based on the observed post-cartel market share), such a unilateral
deviation (and the consequent breakdown of quota agreements) would have lowered the world coee price
by 59% from the actual 197988 level, resulting in a net loss.

17

(ICA) raised price by 75% above the Cournot-competitive level, annually transferring approximately $12 billion from consumers to exporting countries. Second, the lapse of ICA
in 1989 explains four-fifths of the subsequent price decline, that is, the coee crisis. Third,
some suggestive evidence exists on further eciency gains from the post-cartel market share
reallocation. These estimates indicate the ICAs market power and its welfare impacts were
substantial.
From a public-policy perspective, these results suggest market power could be generated
by a trade agreement and used as a substitute for foreign aid; this was indeed the intention
of the U.S. foreign policy during the Cold War era. Likewise, the coee price declined
when the United States reversed this trade/aid policy and withdrew its support for the ICA
regime in 1989. Although the falling bean price benefited coee drinkers across the globe
and was certainly an intended consequence from the perspective of the U.S. trade-policy
makers, the potential magnitude of spillover eects (e.g., the exporting countries sovereign
debt cancellations and the intensifying violence in some areas) suggests a more gradual
withdrawal might have reduced the total cost of handling all such contingencies abroad.
Moreover, the results point to the pitfalls of using market power as foreign aid, given the
eventual reversal of such a policy entailed a severe commodity crisis, with large adjustment
costs in the developing countries as well.
From a positivistic viewpoint, these results also reveal that contrary to the conventional
perception of commodity markets as purely speculative and highly unpredictable, economic
fundamentals of demand and supply are useful for their analysis. Most importantly, despite
the textbook characterization of these markets as perfectly competitive, economic forces
of oligopoly are fully at play. In addition to the coee market, the markets for crude oil,
diamonds, base metals, and tropical agricultural, to name a few, also have a reputation
for cartels and imperfect competition. The markets for cocoa, rubber, sugar, and tin have
historically operated under commodity trade agreements similar to the ICA as well. Thus
economic analysis of internationally traded commodities would gain much from explicitly
incorporating market structure and unique institutional contexts.

18

APPENDIX A. INSTITUTIONAL BACKGROUND OF EXOGENEITY

ASSUMPTIONS
A(i). Product Characteristics
I model coee beans as perishable goods. Coee beans are storable in principle, but their
hygroscopic nature (i.e., they attract and absorb moisture) makes them susceptible to moisture damage (i.e., mold and spoilage). Storage is costly also due to their low value relative
to physical size. Hence only limited inventory exists, mostly for the purpose of smoothing
logistics.
I abstract from production dynamics. A coee tree takes approximately five years to
reach its full production potential. Coee-growing regions are determined by climate and
geography (Figure 4), and drastic changes are rare in a countrys production capacities (i.e.,
the number of coee trees), except perhaps for the case of Vietnam (see Appendix A(iii)).
Thus technological and other supply-side dynamics seem to have limited implications.

Note: r, m, or a indicates cultivation areas for robusta, mixture of robusta

and arabica, or arabica species.
Source: Wikipedia.

Figure 4: Areas of Coee Cultivation

I model coee beans as homogeneous goods. According to Commodity Research Bureau
(2008), 90% of the world coee trade is in green (unroasted) coee beans. Although some
specialty coee is often not purchased on commodities exchanges, their bilateral transaction
prices are pegged to the same benchmark prices. It is also important to distinguish retaillevel product dierentiation from wholesale coee traded as a commodity.
Like wine, coee beans have subtle dierences in aroma and taste by regions and even
by farms. Such subtleties notwithstanding, the price movements of all four types are closely
related, rarely deviating from 5% range from each others level, and with a correlation
coecient of over .93 (for monthly changes in spot prices). In the trading of coee futures,
only one contract instrument (the U.S. coee C contract) exists, and a few adjustment rules
(based on the countries of origin and delivery ports) are considered sucient as contract
specifications for all beans.

19

A(ii). The Cartel and the Cold War: Why the Rise and Fall of the International Coee Agreement Are Exogenous
This section emphasizes the geopolitical nature of the cartel treaty, and extensively draws
on Batess (1997) influential work on the international political economy of the coee bean
market in the 20th century.
Since the 1930s, coee exporting countries had made many attempts to form a cartel-like
arrangement, but none of those attempts survived. A successful quota scheme takes monitoring and enforcement, both of which were lacking. However, the situation changed after 1959,
when Fidel Castro and his fellow guerrillas took power in Cuba: the Cuban Revolution.
After frosty interactions with the United States, the revolutionary government turned to
the Eastern bloc.26 Cuba was a coee-producing economy, and the revolutionary movement
gained momentum from the countryside, just as Mao and Guevara had theorized and practiced. Given this development in the United States backyard, the Kennedy administrations
foreign policy prioritized the fight against communism.
To foster a good relationship with coee-growing countries, the United States used diplomatic alliance as one tool. Sending monetary aid was another. In addition, the White
House decided to provide monitoring/enforcement for its southern neighbors long-sought
quota agreement. Thus the United States signed the ICA in 1962 and, after three years of
negotiations in Washington, Congress approved the legislation for the customs inspection of
certificate of origin (see below) in 1965.27 Other Northern governments (including Japan
but not New Zealand or Israel) had already signed up.28 Thus the ICA quota regime was
motivated not by protectionism in the usual sense but by political considerations outside
the market, as was also the case in Khandelwal et al.s (2012) study of the Chinese export
licenses under the Multifiber Arrangement (MFA).
The ICA used certificate of origin for the monitoring and enforcement of export quota.29
The importing members collected and returned these certificates to the ICO, so that all
exports were publicly recorded. Penalties for excess shipments were imposed through the
deduction of these shipments from the following years quota. Excess shipments in a second
year were penalized by a doubling of the deductions in the next. A third violation would
lead to the loss of voting rights and possible expulsion from the ICO.
In practice, the rules were leniently applied, and loopholes existed. For example, certificates of origin were not required for either imports from non-member countries (e.g.,
the socialist bloc, which comprised the perfectly competitive black market) or exports to
the so-called new markets (i.e., countries in which coee had not yet become a staple of
consumption).30 The problem was that this tourist coee could be re-exported to the tra26

See Domnguez (1978) for the political economy of revolutionary Cuba.

Thus the early 1960s cannot be clearly characterized as either a non-cartel or cartel period. For this
reason, this paper does not intend to analyze the beginning of the ICA. See Bates (1997), ch.5. Other obstacles to the analysis of the coee markets earlier years include the changing identities of newly independent
colonies and the lack of detailed data.
28
European governments had similar interests in stabilizing African economies.
29
Although the ICO statistics do not contain the full details of decision making, the ICO seemed to make
major decisions every three to five years with renewals.
30
The socialist-bloc countries were outside the ICA regime partly because they could not pay in hard
currencies. See Bohman and Jarvis (1990) for a detailed account of the non-member market.
27

20

ditional markets in the member countries. The ICA rules were gradually refined to prevent
major deviations, but room for small-scale cheating remained. Political conflicts were also
rampant. Because the details of data collection, monitoring, quota allocation, and the measures to close those loopholes aected countries dierently, almost every aspect of the ICAs
operation was controversial, which complicated its internal political processes.

A(iii). Geopolitics of Land, Labor, and Ethnicity: Why Vietnams Expansion

Is Exogenous
Although in 1989 the developed world scrapped the subsidies the ICA embodied, the Vietnamese government was expanding coee bean production on the back of foreign aid. After
the U.S. exit from Saigon in 1975 and a fight against China in 1979, this war-torn country
had received an investment from the Soviet bloc in the early 1980s to plant coee trees. The
communist world needed beans available for purchase without hard currency.31
In a series of five-year plans, the central planners orchestrated widespread internal migration that prepared land and labor for coee production, but their motives were more
geopolitical than economic. From the perspective of the post-war strategists, Vietnam faced
three challenges. First, the new government needed to establish control over land abandoned during wars and to secure border areas with China, Laos, and Cambodia. Second,
the planners viewed ethnic minorities as internal political threats, most of whom lived in
the forested upland areas and had sided with the United States during the war. Third, the
peasantry-backed revolutionary government suspected their authority would be undermined
by high and growing population densities in the urban areas of the Red and Mekong Deltas
(Solem et al. 2010).
One solution to these perceived problems was to encourage or coerce large numbers
of Kinh (the majority ethnic population) to move from the north to the under-populated
frontier zone of the Central Highlands, which turned out to be suitable for coee cultivation
(see map in Figure 5). The government designated these areas as New Economic Zones in
which internal migrants produced coee.32 The graph in Figure 5 shows the population of
the Central Highlands more than doubled between the mid 1980s and the turn of the century,
from less than 2 million to over 4 million. A survey performed in 1998-1999 found 89% of the
population of the Central Highlands had not been born there (Duc 2002), which highlights
the scale of the government-led migration.
In addition to these migration policies, the government adopted the Economic Renovation
(Doi Moi ) policy in 1986. This policy constituted economic reforms to create a socialistoriented market economy, which allowed the establishment of an agricultural private sector.
Part of Doi Moi was land reforms. The new Land Law of 1988 sought to grant land use
31
Even after the Berlin Wall fell and Soviet assistance was gone, Vietnam still had other donors, such as
Japan, the World Bank, and the Asian Development Bank. American aid also resumed in 1991. See Library
of Congress Federal Research Division (1987 and 2005), Vietnam Country Study; and Mark E. Manyin,
(2005), U.S. Assistance to Vietnam, Library of Congress.
32
The region was previously populated by ethnic minorities such as Ede, Rong, Sedang, Tai, and Giarai,
most of whom relied on swidden (or slash-and-burn) agriculture. The Fixed Cultivation and Sedentarization
Program also incentivized these groups to abandon nomadic behaviors and join coee farming (Doutriaux
et al. 2008, Ha and Shively 2008).

21

Population of Central Highlands

0.5

5
Population

0.4

0.3

0.2

0.1

0.0

Population (million persons)

Net Increase of Population (million persons)

Net Increase

0
1975

1980

1985

1990

1995

2000

2005

Note: The Central Highlands key attributes are apparent in the map - (1) landlocked, (2) far from the densely
populated Delta regions, and (3) bordering Laos and Cambodia. The region also belongs to the southern half
of the territory, implying the ease of access to its ethnic minorities from the American side during the war.
Source: The map is made by the author from Wikipedias material. The population data since 1995 are from
the General Statistics Oce of Vietnam, and the rest are from Jan Lahmeyers populstat site (retrieved on July
7, 2011, from http://www.populstat.info/Asia/vietnamp.htm).

Figure 5: The Government-led Migration to the Central Highlands of Vietnam

rights to households. All land technically remained under state ownership, but the second
Land Law of 1993 further permitted individuals to trade their land-use rights (Vuong 2001).
The government promoted the expansion of coee cultivation through subsidized land and
loans, and it provided support for seedlings, fertilizer, irrigation, and agronomy (Giovannucci
et al. 2004). As a result, coee-production area grew five-fold in the 1990s (Figure 6), before
it hit the geographical limit in the early 2000s.33

33

The area under crop peaked in 2001 and slightly decreased thereafter. This drop reflects state farms
retreat from unsuitable lands. In ocial statistics, several provinces on the periphery of coee cultivation
appear and then disappear around that time (Ministry of Agriculture and Rural Development). See also
ICARD and Oxfam (2002).

22

600

20
Area Under Crop

Production

Area Under Crop (000 ha)

15
400

300

10

200

Production (million 60kg bags)

500

5
100

0
1975

1980

1985

1990

1995

2000

2005

Source: Reconciled between VICOFA, Reuters, USDA, and GSO, by Asia Commodities JSC. Retrieved
on July 7, 2011, from the website of the Vietnamese Initiative for Food and Agricultural Policy at
http://www.vifap.org/archives/89.

Figure 6: The Geographical Expansion of Doi Moi and Coee Production

23

APPENDIX B. PRELIMINARY DATA ANALYSIS

The changes in the market structure reflect the geopolitical developments that are exogenous
to the price fluctuations in the export market, so simple regressions could inform us about
the determination of the coee price. Such regressions will also clarify the basic sources of
identification for the subsequent structural analysis. Thus, as a preliminary data analysis, I
regress the coee price, Pt , on those shocks to the market structure and controls:34
Pt = b0 + b1 It {ICA lapse} + b2 qtV + b3 Wt + b4 Xt + b5 Zt + t ,

(5)

where It {ICA lapse} is the indicator function that equals one from July 1989, qtV is the
Vietnamese exports, Wt is a set of time dummies representing weather shocks, Xt is the importing countries GDP (population times per-capita income), Zt is the price of tea (arguably
an important substitute for coee), and t is the unobserved shock representing variation in
consumers preferences, the international supply chains, and other random changes in the
commodity market.35
TABLE 5: REDUCED-FORM ANALYSIS OF COFFEE PRICE DETERMINATION
Dep. var.: Pt (Coee Price)
It (ICA lapse)

[1]
194.4
(27.0)

qtV (Vietnams Export)

[2]
175.9
(25.8)

OLS
[3]
[4]
163.7 138.1
(32.3)
(18.7)
43.3
29.4
(19.3)
(16.8)

Xt (Buyers GDP)

[5]
161.6
(29.4)
41.7
(18.6)
42.9
(29.5)

Zt (Tea price)
Constant
Wt (Weather Shocks)
R2
Number of observations

317.2
(23.8)
No
.41
576

292.3
(22.5)
No
.29
576

317.6
(23.8)
No
.42
576

257.8
(11.0)
Yes
.85
576

264.2
(14.0)
Yes
.86
576

[6]
156.9
(23.3)
69.8
(21.0)
218.8
(72.0)
.3229
(.1061)
80.5
(54.8)
Yes
.89
576

Note: ***, **, and * indicate significance at the 0.1%, 1%, and 5% levels, respectively. Standard errors are in
parentheses (clustered by calendar year).

Table 5 shows the results of these regressions. First, the cartels breakdown in 1989
seems likely to be the primary cause of the coee crisis, with big and measurable impacts
exceeding 130 cents across all specifications. Second, the estimates of the Vietnamese export
eect are also statistically significant and its likely magnitude ranges between 29.4 and 69.8
cents. Third, weather shocks are important as a control variable, which is consistent with
various industry reports emphasis. Their inclusion materially improves the fit (columns [4],
[5], and [6]). Finally, the other control variables (rich countries income and population, and
the price of tea) carry expected (positive) signs.
34

I also regressed the observed markup, mt , on these variables and obtained similar results (unreported).
I assume t as i.i.d. in the baseline specification. I also computed the heteroskedasticity- and
autocorrelation-robust standard errors, but the results did not change materially.
35

24

To further explore the likely mechanism of price determination, I ran similar regressions
of costs and markups. Table 6 illustrates that, after controlling for the weather shocks, costs
(farm-gate prices) are not correlated with the lapse of the ICA in a statistically significant
manner, but markups are. These data patterns suggest farm-gate prices are reasonable
measures of costs in that they do not vary with the cartel regime, and the decline of coee
prices is caused primarily by shrinking markups due to the diminishing market power.
TABLE 6: REDUCED-FORM ANALYSIS OF COSTS AND MARKUPS
Dep. var.:
It (ICA lapse)

[1]
75.2
(5.1)

qtV (Vietnams Export)

Xt (Buyers GDP)
Zt (Tea price)
Constant
Wt (Weather Shocks)
R2
Number of observations

170.5
(3.9)
No
.37
360

OLS
mct (Cost)
mt (Markup)
[2]
[3]
[4]
[5]
4.46
.7
.362 .351
(8.7)
(8.7)
(.029)
(.063)
41.3
22.6
.044
(10.2)
(11.6)
(.073)
266.6 176.2
.099
(33.3)
(43.0)
(.241)
.0845
(.0260)
225.2
163.8
.504
.313
(9.0)
(20.9)
(.022)
(.065)
Yes
Yes
No
Yes
.68
.69
.30
.41
360
360
360
360

[6]
.408
(.062)
.160
(.082)
1.082
(.304)
.0009
(.0002)
.355
(.148)
Yes
.46
360

Note: ***, **, and * indicate significance at the 0.1%, 1%, and 5% levels, respectively. Standard errors are in
parentheses (clustered by calendar year).

The impact of the weather shocks deserves further discussion, as the shocks will become
instrumental in the main analysis. Because they are a set of numerous time dummies, I
report their eects visually in Figure 7 rather than as part of Table 5. These shocks, usually
in the form of major frosts in the coee-growing regions of Brazil, induce (both economically
and statistically) significant changes in coee prices. Such frosts last for only a day or two,
but the damages to coee trees are prolonged for up to two years, which is what Figure 5
reflects: the coee price stays at an elevated level (more than 50100 cents above the normal
level) for at least 18 months. Because the mean coee price is 242 cents in my sample, a
major frost would typically raise it by 20%40%, thereby providing us with a key source of
price/quantity variation for estimating coee demand (section V).

25

Impact on Coffee Price

(cents/lb)
200
Coefficient estimate
95% confidence interval
150

100

50

0
1

-50

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Number of Months from Weather Shock

Note: Estimates are based on the regression in Column [6] of Table 5.

Figure 7: Eects of Brazilian Frosts on Coee Bean Price

26

APPENDIX C. ALTERNATIVE EXPLANATIONS FOR THE COFFEE

CRISIS AND ROBUSTNESS CHECKS
C(i). Alternative Explanations and Demand By Time Period
This appendix presents additional results from demand estimation and discusses alternative,
demand-driven explanations for the coee crisis.
I have considered an alternative hypothesis to explain the steep decline of coee prices
during the 1990s. In this Appendix, I discuss a possibility that changes on the demand
side might have caused the markup to shrink, thereby suggesting an alternative mechanism
for the coee crisis. Specifically, an increase in the price elasticity of demand would lower
the equilibrium price independently of changes in market structure (i.e., supply side). After
estimating the coee bean demand for dierent periods (Table 7), however, I found no evidence that consumers became more price-sensitive during the 1990s. The estimates suggest
an opposite tendency, if any. When I split the sample by decade (column [1] through [5] of
Table 7), the quantity coecients for the 1980s, 1990s, and 2000s are 268.5, 146.3, and
21.7, which imply the following price elasticities: 0.17, 0.08, and 0.04, respectively. I also
split the sample in two, before and since July 1989 (i.e., the month when the cartel treaty
lapsed), but again found suggestive evidence in the opposite direction. Columns [6] and
[7] of Table 7 show the price-quantity relationship weakened in magnitude from 322.9 to
153.5, implying the elasticities of 0.26 and 0.16, respectively. These considerations lead me
to conclude the demand for coee beans has not become more price sensitive, so my baseline
results are likely to indicate the lower bound of the price impacts that the supply-side factors
could have had.36
TABLE 7: DEMAND ESTIMATES BY DECADE AND BEFORE/AFTER JULY 1989

Dep. var.: Pt (Coee Price)

Qt (Coee Exports)
Xt (Buyers GDP)
Zt (Tea Price)
Constant
R2
Number of observations

1960s
109.5
(9.9)
196.1
(28.4)
.0508
(.0363)
749
(55)
.49
120

1970s
236.6
(64.0)
1163.1
(126.5)
.5271
(.1144)
1211
(357)
.82
120

By Decade
1980s
256.0
(124.6)
730.0
(640.4)
.3124
(.1180)
1364
(506)
.16
120

1990s
145.7
(25.2)
1040.4
(220.6)
.3480
(.2279)
402
(73)
.31
120

2000s
21.1
(33.0)
458.6
(155.1)
.5627
(.0912)
241
(127)
.66
96

Before/After July 1989

Before
After
318.8 154.2
(47.4)
(32.0)
911.9
627.6
(56.4)
(216.0)
.4381
.6748
(.0973)
(.2394)
1621
581
(265)
(85)
.60
.11
354
222

Note: All estimates use weather shocks as the instruments for Coee Exports; hence the specification is the same as
in column [6] of Table 3. ***, **, and * indicate significance at the 0.1%, 1%, and 5% levels, respectively. Standard
errors are in parentheses (clustered by calendar year).

36

I did not use the demand estimates in Table 7 as the main results because, although all of the coecient
estimates are statistically significant, the goodness of fit varies considerably between sub-samples, possibly
due to the diering patterns across decades of weather shocks.

27

Why do changes in importing countries fail to make demand more price sensitive? First,
the evolution of consumers tastes is not uniform or monotonic across the globe. According to
Americas National Coee Association, per-capita consumption in the United States peaked
in 1962 at 3.12 cups per day and dropped to 1.76 in 2005, but this decline has happened only
gradually over five decades.37 This development is likely more than oset by the population
growth during the same period, along with the increasing per-capita consumption in other
populous countries such as Japan and Germany, as well as the growth of emerging economies.
Second, corporate buyers of coee beans have not accumulated monopsony (oligopsony)
power to match the monopoly power of exporters.38 These buyers are manufacturing firms
that process beans into roasted or ground coee products. Despite occasional mergers and
acquisitions, the roasting industry was still comprised of 219 companies in 1992, 215 in 1997,
284 in 2003, and 253 in 2008 (IBISWorld 2008). Explaining the declining bean price by an
increase in the roasters oligopsony power is therefore dicult. Furthermore, because the
governments of the importing countries policed the cartel agreement, the companies in those
countries were unlikely to have influenced the exporting countries market power on their
own.
Finally, we have Starbucks Coee, the largest coee shop chain in the world. Could
Starbucks meteoric rise in the late 1990s and early 2000s somehow have increased the pricesensitivity of global coee demand? Odds are against this explanation given the following
facts. Even as late as 2007, Starbucks purchased less than 5% of the total global green-bean
exports. This number alone would rule out the Starbucks hypothesis.39 In a broader context,
coee shops are a new channel of coee retailing, but the overall per-capita consumption of
coee in the United States remained roughly constant between the late 1980s and 2000s.
In other words, consumers merely switched from supermarkets to coee shops as a point
of purchase, and only partially. Moreover, although new to America, coee houses have
been around for centuries in Europe and Japan. Londons coee houses opened in the 17th
centuryat around the same time modern corporations were inventedand the first coee
shop in Japan opened in 1878. Hence Starbucks Coee and the emergence of coee shops in
the United States are unlikely to have changed the global pattern of coee bean demand, at
least not in time to explain the decline of coee prices during the 1990s.
Thus, I believe a focus on the supply-side explanations such as the cartels collapse and
extra coee shipments from Vietnam is reasonable.
37

Trade press suggests several underlying developments behind such long-run changes in demand: (1) the
introduction of substitutes such as bottled water and caeinated energy drinks; (2) the price wars between
Coca Cola and Pepsi that since the 1990s have lowered cola prices (arguably a close substitute for coee);
and (3) an increased health-consciousness that somehow deterred many consumers from drinking coee.
38
I abstract from the multi-layered buyers. See Nakamura and Zerom (2010) for the analysis of vertical
relationships and incomplete pass-through at the wholesale and retail levels in the United States.
39
This calculation is based on Starbucks Corporations Form 10-K for the fiscal year ending September
30, 2007. As of September 30, 2007, the company had $324 million in fixed-price purchase commitments,
$49 million in price-to-be-fixed contracts, and $339 million in unroasted bean inventories. Evaluated at the
prevailing spot price of $1.35 per pound, the total amounts to 1.816 million 60-kg bags, which the company
deemed enough stock of green coee through the fiscal year 2008. This number represents a mere 4.5% of
the world export in 2007 (88.148 million 60-kg bags).

28

C(ii). First-Stage Regression

Table 8 shows the first-stage regression for the demand estimation, which suggests high power
of the weather IVs, as well as their joint significance in the F-test. The coeent estimates
indicate frosts in Brazil significantly reduce the global supply of coee.
TABLE 8: FIRST-STAGE REGRESSION FOR DEMAND ESTIMATION WITH
WEATHER IVS
Dep. var.: Qt (Coee Exports)
Xt (Buyers GDP)
Zt (Tea Price)
Wt (Weather Shocks)
Month 1 since Frost
Month 2 since Frost
Month 3 since Frost
Month 4 since Frost
Month 5 since Frost
Month 6 since Frost
Month 7 since Frost
Month 8 since Frost
Month 9 since Frost
Month 10 since Frost
Month 11 since Frost
Month 12 since Frost
Month 13 since Frost
Month 14 since Frost
Month 15 since Frost
Month 16 since Frost
Month 17 since Frost
Month 18 since Frost
Month 19 since Frost
Month 20 since Frost
Month 21 since Frost
Month 22 since Frost
Month 23 since Frost
Month 24 since Frost
Constant
R2
F-statistic
Number of observations

First-Stage OLS
Coecient Estimates Standard Errors
2805
(236)
.6496
(.4274)
157.1
166.1
165.7
237.5
238.6
322.1
408.6
408.4
353.4
352.9
357.6
361.0
391.1
337.5
342.1
365.6
349.5
282.7
268.5
266.0
245.7
246.8
243.5
233.5
4794

(140.2)
(125.3)
(125.2)
(128.3)
(127.6)
(114.7)
(105.8)
(105.5)
(120.9)
(121.1)
(120.6)
(119.6)
(120.8)
(122.7)
(121.5)
(104.7)
(103.9)
(112.9)
(121.6)
(122.5)
(107.0)
(109.4)
(108.7)
(110.2)
(251)
.92
212, 072
576

Note: ***, **, and * indicate significance at the 0.1%, 1%, and 5% levels, respectively. Standard errors are in
parentheses (clustered by calendar year). The regression includes additional 48 time dummies for the second and third
weather shocks, which exhibit similar magnitude and significance (not shown in the table)

C(iii). Other Robustness Checks

Table 9 shows the demand estimates based on the annualized data. The purpose is to
investigate whether the main results (based on the monthly dataset) are sensitive to the
choice of data frequency. The results are statistically significant and almost identical to
29

those based on the monthly dataset.40 Most importantly, my preferred result in column [6]
implies the price elasticity of 0.21 at the mean price and quantity, which is also consistent
with the baseline estimate and the previous studies.
TABLE 9: DEMAND ESTIMATES WITH ANNUALIZED DATA
Dep. var.: Pt (Coee Price)
Qt (Coee Exports)

[1]
6.3
(1.2)

Xt (Buyers GDP)

OLS
[2]
16.7
(2.9)
357.2
(92.2)

Zt (Tea Price)
Constant
Adjusted R2
Number of observations

656
(78)
.38
48

1271
(173)
.52
48

[3]
16.1
(2.2)
678.0
(91.2)
.6781
(.1207)
839
(154)
.72
48

[4]
23.7
(8.7)

1799
(574)

48

IV
[5]
26.7
(4.7)
657.7
(145.5)
1871
(282)
.39
48

[6]
24.3
(3.7)
912.4
(128.6)
.6554
(.1383)
1343
(239)
.63
48

Note: The IV estimation uses weather shocks as the instruments for Coee Exports. Column [4] does not report
R-squared because it is negative. ***, **, and * indicate significance at the 0.1%, 1%, and 5% levels, respectively.
Standard errors are in parentheses.

Table 10 shows the constant-elasticity (log-linear) specifications lead to similar findings,

with the implied price-elasticity of approximately 0.2.
TABLE 10: DEMAND ESTIMATES WITH LOG-LINEAR SPECIFICATIONS
Dep. var.: lnPt (Coee Price)
lnQt (Coee Exports)

[1]
2.00
(.29)

lnXt (Buyers GDP)

OLS
[2]
3.93
(.76)
1.00
(.35)

lnZt (Tea Price)

Constant
Adjusted R2
Number of observations

22.5
(2.5)
.49
576

38.8
(6.5)
.54
576

[3]
3.30
(.53)
1.82
(.27)
1.06
(.18)
26.9
(4.8)
.66
576

[4]
4.88
(1.10)

47.2
(9.4)

576

IV
[5]
5.89
(.72)
1.92
(.32)
55.5
(6.1)
.49
576

[6]
4.71
(.95)
2.38
(.50)
.968
(..199)
39.4
(8.0)
.64
576

Note: The IV estimation uses weather shocks as the instruments for Coee Exports. Column [4] does not report
R-squared because it is negative. ***, **, and * indicate significance at the 0.1%, 1%, and 5% levels, respectively.
Standard errors are in parentheses.

40
The quantity coecients in the annualized dataset should be multiplied by 12 to ensure comparability
with the estimates based on the monthly dataset.

30

APPENDIX D. DIRECT MEASURE OF THE CARTELS MARKET

POWER UNDER SYMMETRY ASSUMPTION
The first-order condition of country is profit maximization (equation 2) implies
)1
(
P
(Pt mcit )
= qit .
Q

(6)

Under the symmetric Cournot assumption, we can sum this equation across countries to
obtain the relation
(P/Q)1
1
t (Pt mct )
= .
(7)
C
N
Qt
This normalized markup, in turn, will facilitate the simulations of counterfactual market
structures (section VI(ii)).41
This static measure of market power is a sucient statistic for the purpose of this study
because we can measure it directly from data. As an alternative modeling approach, consideration of a dynamic game within the ICA cartel, in the spirit of tacit collusion models,
would be of interest. The ICA, however, is an explicit and legal collusion regime that is externally enforced by the importing countries such as the United States. Occasional episodes
of cheating notwithstanding, an exporting country cannot deviate much from its allocated
quota, because the U.S. government and other importing countries monitored and enforced
the quota agreement (see Appendix A(ii)). Moreover, quota is annual and stable over years.
Hence the actual functioning of the ICA leaves little room for truly dynamic strategic interactions, either in the form of repeated game or in terms of production capacity dynamics.
Thus, in the institutional context under study, the static notion of market power (directly
observed as mt and t ) is sucient for measuring the performance of the cartel treaty.
I measured the extent of market power among the cartel countries by observing the
markup and the net demand curve the countries face. One can normalize the price-cost
margin by the price elasticity of demand:
(
)
(P/Q)1
Pt
(Pt mct )
=
1 C mt ,
(8)
QC
Qt
t
which is an empirical analog of t in equation (7) and is expected to equal 1/N under the
additional assumption of symmetric Cournot competition (i.e., 0.0182 = 1/55 under 55-firm
Cournot, 0 under perfect competition, and 1 under monopoly).
Figure 8 contains three key messages about market power during and after the ICA.
First, the t-test suggests the cartel-period average, ICA = 0.1016, is dierent from the postcartel average, P OST = 0.0163, at the statistical significance level of 1%.42 This dierence
reflects the lapse of ICA in July 1989 and implies the cartel exercised measurable market
41

Although this paper focuses on evaluating the cartels overall market power and its global welfare consequences, in principle, one could also analyze markups at the individual country level rather than constructing
an aggregate markup measure such as the above.
42
Here I assume the level of t during the ICA period is fixed by the developed countries foreign policies,
and treat t as constant within each of the two subsample periods.

31

Elasticity-adjusted Markup
.25
Actual
.20

Cartel average
Post-cartel average
95% confidence interval

.15

.10

.05

.00

-.05
1979

1984

1989

1994

1999

2004

Note: The elasticity-adjusted markup uses equation 8 and the preferred demand estimates (column 6 of Table
2) to normalize the Lerner index by the price elasticity of demand.

Figure 8: Market Power during and after the ICA

power. This level of coordination is far from an extreme theoretical possibility of monopoly
pricing ( = 1), and even a Cournot with as few as four or five firms is often considered
quite competitive (c.f., Bresnahan and Reiss 1991).43 Still, given the low price elasticity of
demand and the fact that 55 countries actually compete in the market, this level of market
power seems economically significant, which I will investigate more comprehensively in the
welfare analysis (section VI(i)).
Second, the post-cartel average (0.0163) is consistent with my hypothesis of a 55-country
Cournot because the t-test does not reject P OST = 0.0182 = 1/55. Our measure of market
power comes from data and therefore is not constrained to take values consistent with a
55-firm Cournot model. Third, P OST is still too high for perfect competition, because
the t-test rejects P OST = 0, which is surprising given how close P OST is to zero. Thus
Cournot oligopoly seems to be a reasonable representation for the period since July 1989.
This observation provides us with the basis for counterfactual welfare analyses in the next
section.
Three caveats are in order. First, the industry aggregate equation (8) assumes all countries have the same i , which is consistent with the institutional setup where a single administrative body (ICO) operated the international cartel, and suitable for our aim of measuring
its eective market power.44 Second, this common- assumption implies dierences in coun43
One explanation for this less-than-perfect market power is uncertainty. Each country was faced with at
least three sources of uncertainty that could have made coordination dicult: (1) demand, (2) own harvest,
and (3) other countries harvests and exports. Another explanation is the U.S. did not accept too much
market power.
44
Besides, there is very little economic theory to guide structural models of how [i ] varies across firms
(Reiss and Wolak 2007, p. 4330). We need to assume (at least) the direct measure of the aggregate marginal
cost reflect the true cost.

32

tries outputs are a function solely of dierences in marginal costs, as Reiss and Wolak (2007)
pointed out. My dataset contains suggestive evidence supporting this implication.45 Third,
my measure of the cartels market power is robust to any actual functioning of the cartel and
its individual members behavior (including dynamic game-theoretic interactions) because
the identification of mt and t in this paper uses data on mct rather than its estimates.

45

I found a negative correlation (.26) between the country rankings in qi and mci (197988 average). We
should expect this inverse relationship if we assume marginal costs are increasing in output. Alternatively,
we can also assume constant marginal costs up to capacity, which becomes binding only under severe weather
shocks, as the experience of countries such as Brazil suggests.

33

REFERENCES
[1] Akiyama, T. and Varangis, P. N., 1990, The Impact of the International Coee Agreement on Producing Countries, The World Bank Economic Review, 4(2), pp. 157173.
[2] Asker, J., 2010, A Study of the Internal Organization of a Bidding Cartel, American
Economic Review, 100(3), pp. 724762.
[3] Bagwell, K. and Staiger, R. W., 2002, The Economics of the World Trading System
(The MIT Press, Cambridge, Massachusetts, U.S.A.).
[4] Bates, R., 1997, Open-Economy Politics: The Political Economy of the World Coee
Trade (Princeton University Press, Princeton, New Jewsey, U.S.A.).
[5] Bohman, M. and Jarvis, L., 1990, The International Coee Agreement: Economics of
the Nonmember Market, European Review of Agricultural Economics, 17, pp. 99118.
[6] Bohman, M., Jarvis, L. and Barichello, R., 1996, Rent Seeking and International
Commodity Agreements: The Case of Coee, Economic Development and Cultural
Change, 44, pp. 379404.
[7] Bresnahan, T. F., 1982, The Oligopoly Solution Concept Is Identified, Economics
Letters, 10, pp. 8792.
[8] Bresnahan, T. F., 1987, Competition and Collusion in the American Automobile Industry: The 1955 Price War, Journal of Industrial Economics, 35, pp. 457482.
[9] Bresnahan, T. F. and Reiss, P. C., 1991, Entry and Competition in Concentrated
Markets, Journal of Political Economy, 99(5), pp. 9771009.
[10] Catao, L. and Sutton, B., 2002, Sovereign Defaults: the Role of Volatility, IMF
Working Paper, 02/149.
[11] Clark, T., 2007, Starbucked: A Double Tall Tale of Caeine, Commerce, and Culture
(Little, Brown and Company, New York, New York, U.S.A.).
[12] Deaton, A., 1999, Commodity Prices and Growth in Africa, Journal of Economic
Perspectives, 13(3), pp. 2340.
[13] Deaton, A. and Laroque, G., 1992, On the Behaviour of Commodity Prices, Review
of Economic Studies, 59(1), pp. 123.
[14] Deaton, A., 1996, Competitive Storage and Commodity Price Dynamics, Journal of
Political Economy, 104(5), pp. 896923.
[15] Deaton, A., 2003, A model of commodity prices after Sir Arthur Lewis, Journal of
Development Economics, 71, pp. 289310.
[16] Domnguez, J. I., 1978, Cuba: Order and Revolution (Belknap Press of Harvard University Press, Cambridge, Massachusetts, U.S.A.).
34

[17] Doutriaux, S., Geisler, C. and Shively, G., 2008, Competing for Coee Space:
Development-Induced Displacement in the Central Highlands of Vietnam, Rural Sociology, 73(4), pp. 528554.
[18] Dube, O. and Vargas, J. F., 2013, Commodity Price Shocks and Civil Conflict: Evidence from Colombia, Review of Economic Studies, 80, pp. 13841421.
[19] Duc, D. T. M., 2002, Migration to the Central Highlands in the period of 19941999,
working paper, Hanoi National University of Education, Hanoi, Viet Nam.
[20] Ellison, G, 1994, Theories of Cartel Stability and the Joint Executive Committee,
RAND Journal of Economics, 25(1), pp. 3757.
[21] Genesove, D. and Mullin, W. P., 1998, Testing Static Oligopoly Models: Conduct
and Cost in the Sugar Industry, 1890-1914, RAND Journal of Economics, 29(2), pp.
355377.
[22] Gilbert, C. L., 1996, International Commodity Agreements: An Obituary Notice,
World Development, 24(1), pp. l19.
[23] Giovannucci, D., Lewin, B., Swinkels, R. and Varangis, P., 2004, Vietnam Coee Sector
Report (World Bank, Washington, D.C., U.S.A.).
[24] Gupta, B., 2001, The International Tea Cartel during the Great Depression, 192933,
Journal of Economic History, 61(1), pp. 144159.
[25] Ha, D. T. and Shively, G., 2008, Coee Boom, Coee Bust and Smallholder Response
in Vietnams Central Highlands, Review of Development Economics, 12(2), pp. 312
326.
[26] IBISWorld, 2008, Coee & Tea Production in the US, IBISWorld Industry Report,
31192 (September 28).
[27] ICARD and Oxfam, 2002, The Impact of the Global Coee Trade on Dak Lak Province,
Viet Nam: Analysis and Policy Recommendations (Information Centre for Agricultural
and Rural Development, Oxfam Great Britain, and Oxfam Hong Kong, U.K.).
[28] Khandelwal, A. K., Schott, P.K. and Wei, S. J., 2013, Trade Liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters, American Economic
Review, 103(6), pp. 21692195.
[29] Karp, L. S. and Perlo, J. M., 1993, A Dynamic Model of Oligopoly in the Coee
Export Market, American Journal of Agricultural Economics, 75, pp. 448457.
[30] Mehta, A. and Chavas, J. P., 2008, Responding to the Coee Crisis: What Can We
Learn from Price Dynamics? Journal of Development Economics, 85, pp. 282311.
[31] Nakamura, E. and Zerom, D., 2010, Accounting for Incomplete Pass-Through, Review
of Economic Studies, 77(3), pp. 11921230.
35

[32] Porter, R. H., 1983, A Study of Cartel Stability: The Joint Executive Committee,
18801886, The Bell Journal of Economics, 14(2), pp. 301314.
[33] Prebisch, R., 1959, International trade and payments in an era of coexistence: commercial policy in the underdeveloped countries, American Economic Review (Papers
and Proceedings), 49, pp. 251273.
[34] Reiss, P. C. and Wolak, F. A., 2007, Structural Econometric Modeling: Rationales and
Examples from Industrial Organization, in J. Heckman and E. Leamer eds., Handbook
of Econometrics, Volume 6A (Elsevier, Amsterdam, The Netherlands).
[35] Roberts, M. J., Xu, D. Y., Fan, X. and Zhang, S., 2011, A Structural Model of
Demand, Cost, and Export Market Selection for Chinese Footwear Producers, working
paper, Pennsylvania State University, State College, Pennsylvania, U.S.A.).
[36] Roll, R., 1984, Orange Juice and Weather, American Economic Review, 74(5), pp.
861880.
[37] Singer, H.W., 1950, US Foreign investment in underdeveloped areas: the distribution of gains between investing and borrowing countries, American Economic Review
(Papers and Proceedings), 40, pp. 473485.
[38] Slade, M. E. and Thille, H., 2006, Commodity Spot Prices: An Exploratory Assessment of Market Structure and Forward-Trading Eects, Economica, 73, pp. 229256.
[39] Solem, M., Klein, P., Muniz-Solari, O. and Ray, W., 2010, Population and Natural
Resources: A module for the AAG Center for Global Geography Education, working
paper, Association of American Geographers, Washington, D.C., U.S.A.
[40] Spar, D., 1994, The Cooperative Edge: The Internal Politics of International Cartels
(Cornell University Press, Ithaca, New York, U.S.A.).
[41] Stocking, G. W. and Watkins, M. W., 1946, Cartels in Action: Case Studies in International Business Diplomacy (The Twentieth Century Fund, New York, New York,
U.S.A.).
[42] Varangis, P., Siegel, P., Giovannucci, D. and Lewin, B., 2003, Dealing with the Coee
Crisis in Central America: Impacts and Strategies, Policy Research Working Paper
2993, the World Bank, Washington, D.C., U.S.A.
[43] Verwimp, P., 2003, The political economy of coee, dictatorship, and genocide, European Journal of Political Economy, 19, pp. 161181.
[44] Vuong, X. T., 2001, Changing Land Policies and Its Impacts on Land Tenure of
Ethnic Minorities in Vietnam, working paper presented at the 2001 workshop on Policy
frameworks for enabling successful community-based resource management initiatives
at East-West Center, Honolulu, Hawaii, U.S.A.
[45] Yeats, A. J., 1995, Are partner-country statistics useful for estimating missing trade
data? World Bank Policy Research Working Paper No. 1501.
36