"Do coffee roasters benefit from high prices of green coffee?"
JEL codes: L13, L66
Keywords: roasted coffee market, excise tax, oligopoly, structural error correction model
Abstract: The German coffee industry has repeatedly made the puzzling statement that it would prefer higher prices of green coffee, its main input. Likewise, it supported the maintenance of the coffee tax. In this paper, an oligopoly model with differentiated products is used to illustrate the possibility of profit-raising cost-increases. The relationship between prices and costs of roasted coffee in Germany is estimated, and the hypothesis of overshifting is tested. In addition, the demand for coffee is studied. However, the empirical analysis does not confirm that increasing costs lead to higher profits. Alternative explanations for the coffee industry's statements, based on long term considerations, are also discussed.