Is the market structure of the coffee industry in India a monopolistic competition? If no, which market structure is it?

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Two industries that traditionally represent monopolistic competition are the beverage and restaurant industries because of the large number of providers and the large number of consumers demanding the products. The coffee industry in India is a monopolistic competition because it falls within these traditional industries and meets the defining characteristics...

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Two industries that traditionally represent monopolistic competition are the beverage and restaurant industries because of the large number of providers and the large number of consumers demanding the products. The coffee industry in India is a monopolistic competition because it falls within these traditional industries and meets the defining characteristics of a monopolistic competition, including:

  • many businesses competing for the same customers.
  • the same product offered with unique differentiation or target groups.
  • businesses being price makers as each sets its own price and branding, from elite high-end to street-side walk-up.
  • consumer knowledge about the product being expansive but still imperfect until after consumption.
  • entry to the market by new competitors meeting few barriers (e.g., street carts can sell coffee with little start-up cost).

The coffee industry in India until recently was focused on supplying coffee for (mostly) European export. According to the India Brand Equity Foundation, India has been "the seventh-largest producer and fifth-largest exporter of coffee in the world." For the fiscal year of 2017-18, India's coffee production was "316,000 million tonnes." Because India traditionally is a tea drinking country, except in their southern states, "70 per cent is exported while the remaining 30 per cent is consumed domestically."

Patterns began to change in India's domestic coffee consumption beginning in 2012 when Starbucks entered a "50:50 joint venture" with Indian coffee producer Tata Group and began selling Indian coffee in Starbucks shops in the U.S. Later in 2012, Starbucks entered the monopolistic competition of India's coffee industry by opening the first Indian Starbucks in Mumbai.

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To explain why India’s coffee market is an example of monopolistic competition, we first need to define monopolistic competition and identify some of its key characteristics. Monopolistic competition is a type of imperfect competition in which many producers sell products that are differentiated from one another. In a monopolistic competition, a company charges the same price as its competitors. Characteristics of a monopolistic competition include the following: many producers and consumers in the market, no business with total control over the market price, few barriers to entry and exit, and producers who have some control over the price.

The case of the coffee market in India is unique. Most of the production of coffee happens in the southern state of Karnataka, and coffee production is concentrated in Southern India. There are a lot of government efforts to encourage research, marketing, and promotion of coffee as a product, as well as to protect workers and keep barriers to entry low for coffee producers. In this way, the producers have some control over the price and are protected by the government.

The coffee market in India is very different in the sense that there are some big established brands like Café Coffee Day, who operate like Starbucks and Costa Coffee do in the west. There are a lot of small coffee stalls run by young entrepreneurs who were able to set up due to the low barriers to entry. There are many coffee producers and consumers in the market, and while Café Coffee Day has a large portion of the market share (among those who can afford to shop there), they do not have total control over the coffee market. There are many coffee stalls that succeed in smaller towns and cities, where traditional filter coffee is preferred over espressos, cappuccinos, and lattes, which are found at Café Coffee Day.

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Monopolistic competition is a type of imperfect competition in which firms sell products that are differentiated from those of their competitors.  Product differentiation is typically achieved by monopolistic firms through the branding of their products with the use of logos and slogans, labels, and product packaging.

The market structure of the coffee industry in India is a monopolistic competition for the following reasons:

Product Differentiation - The coffee sold by each firm in India's coffee industry is differentiated by branding. Therefore, each coffee firm sells differentiated beverages such as hot chocolate, lattes, teas, espressos, and cappuccinos in labeled coffee cups and packaging. Furthermore, differentiated toppings such as whipped cream, sprinkles, and chocolate drizzle as well as differentiated pastry items such as muffins, soups, and sandwiches may also be offered.

Market Power - Each firm has some degree of market power in the coffee industry. Market power enables each firm to have control over their decision-making process in regards to the quantity of coffee to be produced and the selling price of each cup of coffee.  Therefore, each firm produces at a level that ensures profit maximization. For example, CoffeeHouse located in East India may choose to sell their dark coffee beverages for $1.50, whereas, CremeBeans located in the western part of India offers dark coffee beverages for $1.95.

Asymmetric Information - Information in the market is not perfectly distributed amongst sellers and buyers; as such, the price offered in coffee shops blocks away from each other could be different. For example, locals know the cheapest coffee shop in their community but visitors would not readily have access to this information.

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