On Price Dynamics for Different Qualities of Coffee

Abstract

This paper conducts an examination of the price relationships of different qualities of coffee and how prices adjust over time in relation to each other. The main result shows that using threshold models, the coffee market may be considered to be highly integrated, contrary to the results obtained using standard cointegration methods. Further, the results indicate that either prices adjust to any deviation only when they are increasing or decreasing, or that a rise in the price of a high quality coffee might lead to a slower rise in the price of a relatively lower quality coffee, while a decline in higher quality coffee prices might trigger a relatively rapid fall in lower quality coffee. The paper concludes by providing an explanation to this asymmetric price adjusting behaviour.