Economic Analysis of International Cocoa and Chocolate Market

1 January 2017

In the last 20 years various forces underlying chocolate market changes the market structure, which influences the market structure of cocoa beans, the most important raw materials for chocolate production, evidently. In this essay I will discuss the changing market structure of both markets, and the strategies that chocolate and cocoa producers employed to face challenging from the market.

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In addition, cocoa industry in most of cocoa planting countries plays a significant role in export revenue; hence, this essay will also analyze the effect of increasing demand for chocolate, fair trade, and policies on those regions from the macroeconomics point of view. Before looking into the pricing and production decisions of the firms that operate, I will demonstrate the structure of chocolate and cocoa market primarily. The characteristic of chocolate market shows that it has a monopolistically competitive market structure.

Many companies find their profits are constrained by tight price in the market (The Economist: Britain: Stuffed; Chocolate 2004, p. 29), which indicates the sever competition within the industry. Admittedly, some companies have a dominated status in the chocolate market, say, Kraft, Mars, Nestle, Ferrero and et cetera. Yet some other chocolate firms that compete with those big brands account for a certain market share. Besides, unlike heavy industries which need considerable initial capital to set up a company, it does not cost much to start a chocolate business, and the producing process is much easier.

Therefore, there is freedom of entry of new firms into the chocolate industry. Lastly, the product differentiation for chocolate is another evidence for chocolate market belonging to monopolistic competition. Different tastes of chocolate provide more choices to buyers, and in latest years other characteristic are vying for consumers’ attention, such as products with a fair trade label, organic or healthy chocolate make their product different from each other. But the innovation of chocolate is limited (The Economist: Britain: Stuffed; Chocolate 2004, p. 9), and they are still producing similar goods.

The structure of cocoa market belongs to perfect competition, but it is affected by the changing of chocolate market these years. Generally, thousands of planters in this industry produce standardized cocoa beans. For example there are around 800000 farmers in Ghana producing 379000 tonnes of cocoa ever year (Sean 2002, p. 29). In addition, they have not ability to differentiate their products from those of other farmers. Hence, those planters have not enough power to control prices.

Although some barriers to entry relate to the restricted environment of planting cocoa, there are no barriers to exist from the cocoa market. However, in these years some cocoa producers are engaged into the production of organic cocoa to satisfy the demand from chocolate market, which could effectively differentiate their products from those standardized cocoa and enable organic cocoa planters to charge a higher price. Generally, the niche markets as organic and fair-trade markets are growing in both chocolate and cocoa market these years. Now I will move onto the forces and strategies in both markets.

Since the structure of chocolate market is of monopolistic competition, indicating chocolate sellers facing a highly, but not perfectly elastic demand curve, companies have to use several strategies to survive and maximize their profits in the bitter contest, relying upon the features of forces underlying the industry. Supply and demand are the forces that make market economies work. Specifically, consumers’ preferences, and the number of buyers are the main determinants of chocolate market demand, while resources’ prices influence supply significantly.

We may initially discuss changes in demand, assuming no other factors influencing supply. Demand for chocolate increases when certain characteristics of chocolate could induce them to buy more. For example certain flavors of chocolate could be more attractive to most consumers, and they will buy more bars of this kind of chocolate, shifting the chocolate demand curve to the right. But demand curve could shift to the left when people begin to worry about their health. As shown in figure 1, increase in demand shifts the curve from D0 to D1, while decrease shifts it from D0 to D2.

For example, in 2001 chocolate sales in Britain, the largest chocolate consumption country saw a dramatic decline, mainly because most British began to notice that obesity could be related to eating too much chocolate (The Economist: Britain: Stuffed; Chocolate 2004, p. 29). In addition, the withdrawing of British from chocolate market can be viewed as a reduction in the number of consumers, another factor of demand determinants. Decreasing number of buyers in the market shifts the demand curve to the left, and vise versa.

In order to maintain profits, chocolate sellers employ different strategies to cater their customers’ preferences and struggle to move the demand curve to the left. In the above example, some companies were planning to produce a new flavor chocolate to increase the number of buyers in Germans and Japanese (The Economist: Britain: Stuffed; Chocolate 2004, p. 29), so the loss in Britain could be offset by increasing profits in other countries.

Besides, some companies provide ‘healthy chocolate’ to satisfy those buyers who pay attention to their health or nice figure, dark chocolate, or chocolate without sugar and diary. As for companies who initially use these strategies, they could gain more profits in the short run. Figure 2 is in this situation. In the long-run more companies will employ the same strategies, and the profits will decline to a normal profit.

Chocolate firms use various inputs to produce: cocoa beans, milk, sugar, flavoring, cocoa butter or palm oil, chocolate-producing machine, workers and so on. When the price of one or more of these resources rises, sellers will find it less profitable, and firms supply less chocolate, shifting the supply curve of chocolate to the right. Until discovering their fixed costs is less than total loss companies might close down. As the most important ingredient of chocolate and irreplaceable status in chocolate production, price of cocoa beans have strong effects on chocolate supply.

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