The Economics of Quality in the Specialty Coffee Industry: Insights from the Cup of Excellence Programs
Type of Degreethesis
Agricultural Economics and Rural Sociology
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This study estimates price determinants for specialty green coffee auctions using records from the 2004-2010 Cup of Excellence programs hosted by the Alliance for Coffee Excellence. Similar to a paper by Donnet et al. (2008), I use a hedonic price function to determine the implicit prices of sensory and reputation aspects of coffee quality. The former study is limited by missing variables and uncorrected truncation in the dependent variable. I include the necessary additional variables and estimate the function using a truncated maximum likelihood estimation technique. While sensory quality has a strong effect on price, the highest premiums stem from obtaining a top rank compared to other coffees from the same country, and North American buyers are more responsive to sensory quality than buyers in Asian and European markets. Truncated maximum likelihood estimation produces more normally distributed errors and reveals OLS estimates to be biased toward zero.