Tuesday, March 30, 2010

Competition in the UK Specialty Coffee Market

The specialty coffee market (lattes, cappuccinos, mochas, etc.) is an interesting market where we can see how markets revert back to long-run equilibrium. In an article about Starbuck's woes in the UK specialty coffee market, the article notes that Starbuck's entered the UK market in 1998 by taking over Seattle Coffee Company's 65 coffee stores, and by 2005 there were about 450 Starbuck's in the UK. Starbuck's expansion was feed by higher profits for selling specialty coffees to consumers in the UK.

Yet those higher profits also resulted in greater competition in the UK specialty coffee market. Costa Coffee entered and now has more specialty coffee stores than Starbuck's. Subsequently, with the recession - and decline in demand, we see that some specialty coffee firms (Coffee Republic) went into bankruptcy (administration) and that Starbuck's is shutting down some stores that are under-performing. What we also see is that Costa Coffee is actually increasing the number of stores. This is different from what we normally talk about in a introductory long-run discussion, as that discussion assumes that all firms are identical - to make the argument easier to follow. When firms are asymmetric and when demand shifts to the left, we can show theoretically that some firms will exit (Coffee Republic) some will be shutting down stores (Starbuck's) and some firms will be expanding (Costa Coffee).

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