Case Analysis

Coffee Exports Curbs

Presented By GROUP 18 Gaurav Mittal Divya Subramanian Ashish Kumar Apte

Preface
This case is taken from the year 1994 when pooling system in coffee trading was prevailing in

Indian domestic market . Coffee producers used to give their produced output to the Coffee board and get their share of profits.
Here, coffee board is actually acting as a monopoly, having strong influence on the domestic coffee prices and also the flexibility of charging different prices to different market segments.
In such a non competitive environment, prices have to be reduced to increase the sales and

monopolist firm like to produce and sell at the profit maximization level where their Marginal Revenues are equal to Marginal costs i.e. MR = MC and also MR is less than the price at which firm wants to sell i.e. Price > MR.
Government intervention is required to boost the domestic coffee market in the interest of the

coffee consumers primarily because of approaching elections in the major coffee consuming states.

Overview of the Case

Domestic consumption of coffee in India has reduced by 20 % due to drastic upward spurt in

coffee prices over the last few months and it has become a serious matter of concern for Indian Government ahead of forthcoming elections .
Frivolous price bidding by coffee dealers in the market leading to further rise in prices.

On 5th August, Indian Govt. announced cap on coffee exports at 1.10 lakh tones for the current year to increase the coffee supply in domestic market which would help them to : a) control the price hike in domestic market and b) Revive the domestic coffee demand which has declined due to persistent price hike. Indias share in international coffee market is 2 % where the market is a nearly perfectly competitive market due to many firms operating.

What is the nature of demand curve in domestic market?

In domestic market we can say that demand curve for both industry(coffee market) and

monopoly firm(coffee board) is same because of the non - competitive and monopolist environment.
Since 20 % increase in prices (Rs 150 to Rs 180) has resulted in 20 % decline is domestic

consumption of coffee i.e. delta Q = delta P , so demand curve in domestic market is negatively downward sloping and the slope of the demand curve depends on the type of coffee produced. However price elasticity is low as compared to international market.
Now to reduce the prices, govt has decided to divert the international market share to the

domestic market thereby, leading to a supply expansion resulting in a price fall.

Being a monopoly firm, the board also has to reduce its prices to increase its sales and since

demand curve is downward sloping it would ultimately revive the declining domestic demand of coffee in India.
However, Coffee board in India would like to operate at prices higher than its MR and MC i.e.

P > MR or MC so as to earn profits.

Demand curve in the domestic market. Same for both market and monopoly firm
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What is the nature of demand curve in international market?

As given in the case, Indias share in international market is 2 %. This shows that Indias

contribution to total international coffee consumption is not significant and any change in export policies of India would have very less impact on the demand behaviour in the International market
International coffee market has competitive environment where there are many coffee firms

and market demand and supply forces would decide the equilibrium price.
Firms are the price takers and they operate at the given equilibrium price thereby deciding how

much to sell depending upon the total market share .

Single coffee producer or firm can not influence market price and there are lot of substitutes

available which shows demand is perfectly elastic at the firm level.

At the firm level, the quantity produced will be determined by the amount at which the firms

MC curve intersects with the market price as in a perfectly competitive market, P = AR = MR.

P* & Q* are equilibrium market price & quantity

Demand curve at industry level in the international market.

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Demand curve at firm level in the international market. Firms are the price takers
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Demand curve in case of price discrimination in combined market

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What are the decision issues for coffee board ?

Pre export restrictions, as higher prices were prevailing in the international market in

comparison to the domestic market, the coffee board was selling more quantity in the international market thereby earning higher profit margins in comparison to the domestic market.
Coffee board being a monopoly, can fix either price or quantity, so post restrictions, to sell more coffee in the domestic market, prices have to be reduced i.e. P= AR for the quantity supplied in the domestic market.
Post export restrictions, coffee board needs to reevaluate their production strategy and pricing in

such a way that its marginal revenues in both the markets are equal.
In the changed scenario of export curbs, the board will need to look at the combined marginal

revenue and MC curve and decide the profit maximising output (Q) accordingly.
Any change in export policy should be justified as a business decision taken in the interest of

people.

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Pricing Decisions
In both the markets, coffee board will distribute the total output Q such that profit in both the

markets are maximized. Price charged in both market will correspond to the MR= MC point.
As price elasticity in domestic market is low in comparison to the international market, the

prices charged in the domestic market would be higher compared to the international prices.
Post export restrictions, more part of coffee boards total output would be sold in India and as

supply expansion leads to price fall, so it has to sell coffee at the lower price in domestic market which could affect its profit margins.
Karnataka and Tamil Nadu together constitute 82 % of total domestic coffee consumption . On

one side there would be immense pressure from govt. on coffee board to reduce the prices ahead of forthcoming elections in the two states and on other side there would pressure of falling profit margins.
Therefore, in the revised scenario of export curbs with price discrimination being practised, the

board can defend their profit margins by becoming more cost efficient monopoly firm.

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SUMMARY
In a monopoly environment, firms are price makers and sell its output at higher margins of

profit.
For maximising profits, the firm can practice price discrimination where different prices can be

charged for different markets for the same product.

In price discrimination practice, the prices charged will depend on the price elasticity of demand. Coffee board being a monopoly can set the domestic prices but they can not influence coffee

prices in international market where there is lot of competition.

By announcing the cap on coffee exports, govt. is trying to increase the domestic supply and

trying to control the prices and thus creating positive sentiments among consumers ahead of forthcoming elections in Karnataka and Tamil Nadu.
Indias share in international market is only 2% which means that any change in export policies

of India would have very less impact on demand behaviour in International coffee market.

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Thank You

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