Fair Trade Coffee and the Mitigation of Local Oligopsony Power

Published on 17 November 2013

A growing phenomenon in consumer goods markets is the growth of ethical
consumption movements, including ‘No Sweat’ campaigns for clothing, environmentally oriented organic food markets, and ‘fair trade’ markets for goods
such as coffee. These markets use alternative distribution channels to link
consumers with producers who employ particular methods of production. The
purpose of alternative channels is typically the mitigation of an apparent
market distortion.

In recent years, there has been considerable growth in ‘fair trade’ markets for several commodities, most notably coffee. We argue that coffee is grown under conditions that might well subject growers to the market power of downstream intermediaries (processors). Using an approach designed to evaluate the effects of state trading enterprises on trade and welfare, we develop an oligopsony model of intermediaries. In this model, fair-trade processors optimise a welfare function that includes the producer surplus of coffee growers. This concern for growers’ welfare among some processing firms helps to alleviate the market power distortion. We calibrate the model to price data reported by a fair-trade organisation and consider the counterfactual removal of fairtrade behaviour by processors. As expected, the income of coffee growers (in aggregate) is reduced, though the effects are quite small.