Coffee & chocolates, more sophistication & innovation

Yeah, it's me again. The boarding school wireless is really terrible, so I have to post the two altogether.

The increasing sophistication of coffee drinkers is good for producers
http://www.economist.com/business/displaystory.cfm?story_id=11058477

Excerpt: As consumers in India and China develop a taste for the drink(coffee), prices are likely to keep rising. Meanwhile something new is happening in developed markets. Europeans, Americans and Japanese are switching to higher-quality coffee. Discerning consumers now demand authenticity: they want stories about where their coffee beans come from. So the best coffees will increasingly be differentiated, like fine wines and spirits, and sold at previously unthinkable prices.

A start-up innovates in an unexpected field – chocolates
http://www.economist.com/business/displaystory.cfm?story_id=11058598

Excerpt: Its founders believe there is vast scope for innovation in the way chocolate is made and sold. Most cocoa farmers have never tasted chocolate, and produce cocoa beans without any idea of how they will be used. So Mr Childs wants to put things on a more technical footing—just as Americans formalized techniques for winemaking in the 1970s. He has developed ways to analyze and grade beans. ……worked out how to get cocoa beans to reveal their complex flavours and to get chocolate to solidify evenly.

Review:
These two articles about coffee and chocolates have illustrated similar economic concepts.

Both mention that the differentiation of the products is good for the producers. This is because by making the products more unique, there will be fewer substitutes, cross elasticity of demand is reduced. Fewer substitutes also make the demand more price inelastic. Thus, by charging higher prices, the producers are able to earn more revenues.

First article also mentions the developing taste of Chinese and Indian consumers for coffee. As coffee gradually becomes a habit of life or even an addiction for the Chinese and Indians, change in price will not affect much on their consumption. Hence, demand for coffee will be more price inelastic. As a result, the best coffees can be “sold at unthinkable prices”.

As for the second article, I think monopolistic competition may be useful in explaining the innovation in chocolates production. Chocolates market well fit the characteristics of monopolistic competition. They are
- There are many producers and many consumers in a given market.
- Consumers perceive that there are non-price differences among the competitors' products.
- There are few barriers to entry and exit
- Producers have a degree of control over price.

If the company manages to produce the chocolates with uniquely complex flavors, it will create a new brand of chocolate for itself. Under the monopolistic market structure, the company will have a degree of control over its price. Due to loyalty to the brand, the company may charge a relatively high price for their chocolates products. They may be earning supernormal profits in the short run. In the long-run, however, whatever distinguishing characteristic that enables the company to reap monopoly profits will be duplicated by competing firms. This competition will drive the price of the product down and, in the long-run, the monopolistically competitive firm will make zero economic profit.

Xu Hao