Implications of product differentiation in food demand: The case of coffee in the United States

Abstract

In recent years agricultural products have been going through an intense differentiation process in the U.S. Coffee differentiation strategies are being implemented by producing countries to increase their profits and welfare. Roasters and associated companies in the consuming countries are also implementing product differentiation strategies to enhance consumption and profits. This new trend in market structure organization due to heterogeneous supply and demand for differentiated products brings about questions that need to be studied. The question we pursued to answer in the present study is whether regular (undifferentiated) and differentiated coffees behave as different products, particularly if they exhibit different demand patterns and elasticities. To answer this question the present study estimated the demand parameters using retail level data of regular and differentiated coffees for the entire U.S. market as well as for the metropolitan areas of Chicago, Houston, Los Angeles, New York, and Seattle -Tacoma. The group of coffees differentiated by country of origin was also studied and the demand parameters estimated for the U.S. and the selected metropolitan areas. A unique data set was developed to classify the differentiated coffees. The data source used for the research is weekly coffee sales scanned data with information at retail level in the U.S. and selected metropolitan areas from 2001 to 2006 (313 weeks). The Almost Ideal Demand System (AIDS) model was used to estimate the parameters. The principal findings of the present study are summarized as follows: 1) the results of the study suggested that regular and differentiated coffees in the U.S. and the metropolitan areas of Chicago, Houston, Los Angeles, New York, and Seattle-Tacoma behave as different products, 2) the study also suggested that regular and coffees differentiated by country of origin behave as different products in the U.S. and the metropolitan areas studied, 3) expenditure elasticities suggested that regular, differentiated, and differentiated by country of origin coffees are normal goods for the U.S. and the metropolitan areas 4) own-price coffee elasticities for regular, differentiated, and differentiated by country of origin coffees are mainly elastic in the U.S. and in the selected metropolitan areas, 5) a substitute relationship between differentiated coffees by country of origin coffees was expected, however several complementary relations were found in the present study for the U.S. and the metropolitan areas, 6) consumers in the U.S. and the metropolitan areas studied did not exhibit similar preferences for regular, differentiated, and differentiated by country of origin coffees, and 7) the analyzed database strongly suggested that the U.S. consumer is willing to pay in average 33.00% more for differentiated coffees than for the regular coffee, and from 19.00% to 217.00% more for coffees differentiated by country of origin than for the regular coffee. Coffee producing countries and/or roasters and marketers from consuming countries may be able to use the results of the present study to forecast demand for regular and differentiated coffees in the U.S. market and the selected metropolitan areas considering demand parameters, prices, and consumers' preferences by location. The present study also provides information that may be used to design marketing strategies for regular, differentiated, unclassified, and differentiated by country of origin coffee in the U.S. and the metropolitan areas of Chicago, Houston, Los Angeles, New York and Seattle-Tacoma.