Starbucks Coffee: Buy Low Sell High

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This paper is a case analysis of coffee market. The purpose of this paper is to study the supply and demand mechanism through the case analysis of Starbucks in coffee market. This paper has three main sections. The first two section states the problems in coffee market and its ramifications. The first main problem is that Starbucks being the price maker in the oligopolistic coffee retail market, Starbucks exerts its market power to set its coffee retail price much higher than other coffee sellers. The second problem facing by the coffee retail market is unsteady supply of coffee beans. The third section states the proposed solution to the above two problems. Possible solutions for the first problem include introducing
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Starbucks had branding itself as specialty coffee retailer and differentiated its coffee as high quality coffee for unique tastes and preferences. With the successful product differentiation, the demand of Starbucks coffee has become more and more inelastic compare to that of other coffee sellers. In other words, customers preferred more of Starbucks coffee to other coffee seller as they were becoming more addicted to Starbucks coffee and did not see other coffee as substitutes. Under such circumstances, the change in quantity demanded of Starbucks coffee was highly insensitive to a change in price. Therefore, the quantity demanded of Starbucks coffee remained unchanged when Starbucks coffee price was raised to $3.5. However, the other coffee sellers were having a more elastic demand curve. A small percentage increase in price would have caused a large percentage decrease in quantity demanded. Therefore, other coffee retail sellers have not raised their coffee prices for a long time. Referring to the diagram below, D2 is the demand curve of Starbucks which is more inelastic; while D1 is the demand curve of other coffee retail sellers which is more elastic. When price increased from P0 to P1, Starbucks would have a very small drop of quantity demanded of Starbucks coffee by an amount of quantity Y; while other coffee retail sellers would have a huge drop of quantity demand by an amount of X.

Problem Definition 2 –
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