I have been reading about coffee in our culture.* I was intrigued by the idea of Third Wave Coffee business discussed by philosopher John Hartman. The Third Wave in coffee refers to the growth of small, independent coffee roasters who developed as alternatives to Starbucks when that company grew and disaffected coffee drinkers looked for alternative sources for their caffeinated drinks. If you recognize the brands Stumptown, Intelligentsia, or Columbia Street you know what I am talking about.
Hartman sees the Third Wave as a new form of business where companies try “to do good and make money.” He calls this a form of “hybrid capitalism, balancing the profit motive with social entrepreneurship.” So companies of this type provide a relatively small clientele with great tasting coffees (have you ever been to a cupping?) and verified attributes in the sourcing of coffee beans– organic, shade-grown, bird friendly, direct trade (it’s better than fair trade), single-farm sourced, etc.
Economists would recognize this as not at all new but rather a new manifestation of one of the most common market forms in modern capitalist economies – monopolistic competition.
If you took an economic course you probably learned first about two market types called perfect competition and monopoly. In reality, neither exists in our economy in its pure form, but learning about these helps one to understand markets in the real world, where monopolistic competition is common.
Competitive markets are supposed to be ideal because they produce goods and services for consumers at the lowest cost and use society’s scarce resources most efficiently. Monopoly is supposed to be bad because it allows one firm to earn larger (monopoly) profits, disadvantaging both consumers and society at large. Firms would like to operate in a monopoly market if they could.
In monopolistic competition, firms try to earn larger profits but still face competitive pressures. Third Wave coffee is a good example. In this market type the company tries to convince consumers that there is something special, maybe even unique, about the products sold under its brand. The company tries to differentiate its product from those offered by the competition. The goal is to shift the perspective of the coffee consumer from seeing herself as a coffee drinker to seeing herself as, for example, an Intelligentsia coffee drinker. If successful, the firm now has a monopoly on coffees of that brand and can successfully charge monopolist prices.
For a Third Wave coffee company, the goal is to satisfy existing consumer interest or create new consumer interest in attributes that its customers believe only that company can offer. These attributes differentiate its products. Since these are often sophisticated consumers, it is often important to prove these differences. Hence we see schemes to certify desirable product attributes. Throughout the economy we see certification programs for fair trade, gluten free, organic, kosher, sustainably harvested, etc.
The competition part of monopolistic competition is that firms are always trying to create new and better differentiation to set themselves apart from those who have been successfully earning monopoly profits. This very phenomenon is seen as Third Wave coffee companies differentiated their brands from Starbucks as it grew beyond its original ethos as a brand.
We see monopolistic competition throughout our modern economy, often expressed in the business media as a result of good brand management. I noted that Swedish professional golfer Henrik Stenson wears Hugo Boss apparel (pro golfers often appear to be walking billboards). I checked and found I could get a Hugo Boss polo for as little as $70.00 and might pay as much as $275.00 for one. (I did not place an order.) Clearly the goal of paying Stenson to wear these shirts is to move me from being a polo shirt buyer to a Hugo Boss shirt buyer, for which that company would earn monopoly profits from my order. The same idea motivates Nike to pay LeBron James and Under Armour to pay Bryce Harper.
So for me, there is nothing new about Third Wave coffee businesses. It is good that farmers in the tropics get paid a fairer price for their coffee beans and that coffee is grown with the conservation of bird habitat in mind. But I do not forget that the desired end is to convince me to pay premium prices so that the firms can earn premium profits. There is nothing hybrid about this form of capitalism. It is a dominant market type in the Western World today – monopolistic competition.
If you please, I’ll have a cup of La Esmeralda Panama Mario Carnaval!
*Specifically for this blog: Hartman, John. (2011). Starbucks and the Third Wave. In Parker, Scott F. and Austin, Michael W. (eds.). Coffee – Philosophy for Everyone: Grounds for Debate. Chicester: Wiley-Blackwell