A rich data set of coffee prices and costs was used to determine to
what extent changes in commodity costs affect manufacturer and
retail prices. On average, a 10-cent increase in the cost of a
pound of green coffee beans in a given quarter results in a 2-cent
increase in manufacturer and retail prices in the current quarter.
If a cost change persists for several quarters, it will be
incorporated into manufacturer prices approximately cent-for-cent
with the commodity-cost change. Given the substantial fixed costs
and markups involved in coffee manufacturing, this translates into
about a 3-percent change in retail prices for a 10-percent change
in commodity prices. Coffee manufacturers do not appear to take
advantage of manufacturing and production cost variation to raise
retail prices; retail prices respond the same to both increases and
decreases in costs of coffee beans.
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