Are Coffee Prices Fair?

June 26th, 2008 | economics -

Comment from: Is the Price of Starbucks a rip off?

Is the price of Starbucks coffee a rip off you ask… I have seen on this website you have written some article on supply and demand and therefore the answer should be quite obvious.

Starbucks coffee as sold from their many outlets which need to cover the cost of each shop, packaging, staff, etc etc.

Remember when buying their coffee you are also buying a brand and also their experince – that costs money so no it is not a rip off they have simply put a value on their product to distinguish themselves in the market.

I think the reader makes a good point. Starbucks operates in a competitive market. If it charges £2.10 for a cappuccino then you could argue that is a ‘fair’ market price because that is what people are willing to pay.

When Could Market Prices not Be Fair?

If a firm has monopoly power and it charges higher prices than in a competitive market. For example, an electric supplier may have monopoly power and it could charge high prices because demand is inelastic. This is not really the case with Starbucks because there is a reasonable level of competition for coffee on the high street.
Trading on its Brand Name. You could argue a firm like Starbucks builds up a brand loyalty causing demand to be inelastic but, then the quality of its product deteriorates and it relies on a consumer loyalty it doesn’t really deserve. This is rather a moot point and certainly slips into the realm of ‘normative economics’. If you ask several people about the quality of Starbucks, you will get several different answers. But, I assume, those buying the Starbucks think it is worth the price otherwise why would they continue to do buy it?

To be honest, it is rather hard to justify that Starbucks coffee is a ‘rip off’. I think it produces the most disappointing coffee on the high street, but that is just a personal view and enough people seem to take a different view and are happy to pay the price. In the absence of monopoly power, you can argue the price is reasonably fair given the competitive nature of the market.