Starbucks Coffee As A Veblen Good In Jakarta Economics Essay

For my research to obtain my information for the essay, I visited 5 star bucks outlets in different parts of Jakarta and conducted a survey in each outlet by asking customers their opinion towards star bucks coffee. 50 customers cooperated in filling the survey to help me out with my essay. The outcome of the surveys have been analyzed to determine whether star bucks coffee is a Veblen good or not in Jakarta.

Introduction:

When I was deciding on my extended essay topic, I decided to base my research question on coffee in Indonesia, since coffee is a staple for the local people. My interest in choosing a Veblen good to be investigated upon rose when I was taught about the goods that are in exception to the theory of the law of demand. Since the law of demand states that a rise in the price of goods and services of a commodity would cause the quantity demanded to decrease. A Veblen good is a good which opposes this theory as the rise in the price of a Veblen good would result the quantity demanded for the good to either stay the same or also increase. Veblen goods are goods bought for ostentatious purposes and the Veblen good I chose was Starbucks coffee which is very famous and is the biggest coffee franchise in the whole of Indonesia. The first star bucks coffee was opened in Seattle in 1970s and in 1982, Howard Schultz, joins star bucks and when he visits Italy, he feels that there will be a potential for coffee in America since he sees the growth of the coffee franchises in Milan. In the 1990s star bucks expands beyond Seattle first to around the United States and then became an international franchise. In 2002, MAP, the leading retail brand franchising, won the master licensing agreement to open star bucks in Indonesia, and the first store opened in May of 2002, in a high class plaza, plaza Indonesia. So, Starbucks is a new franchise in Indonesia.

Starbucks coffee may be called a Veblen good in Jakarta, because star bucks, is only there in the areas of the wealthier people of Jakarta. And some people in Jakarta consume it because it is a trend, or because of the name and they wouldn’t prefer any other coffee franchises.

The theory of Veblen goods:

Veblen goods are goods bought for ostentatious purposes and not for practical use. It is a good which is an exception to the theory of the law of demand. It is a form of status symbol. They are goods bought for a snobbish value. It is a display of people’s wealth. If the price of the good rises, people would buy them because they are more expensive and buy less if they are cheaper. The wealthier part of the population would be able to afford more of Veblen goods as compared to the less wealthy part. Since the wealthier part of the population have a higher income and their disposable income is also higher as well. So their disposable income is greater. Veblen goods would include expensive cars, jewelry, branded clothing, etc. Veblen goods would not make the demand curve slope downwards

Veblen goods and income effect:

The main reason a demand curve is downward sloping is because of the income effect and the substitution effect. The income effect states that if the income of a house hold increases, the quantity demanded for the good increases, since the disposable income increases. Disposable income is income after all the taxes have been paid and all the transfer payments. This would result in households to be able to purchase more goods and services of a commodity. The income effect is one of the reasons why the demand curve is downward sloping because when the price of the good falls, the real income of the consumer rises, causing the consumer to buy more of goods and services and if the price of the good rises, the real income of the consumer falls and they can would buy less of all goods and services.

The people who I interviewed were people of different star bucks customers with different income ranges. My analysis of the survey show that 50% percent of the people said that their income is more than Rp 30 000 000 10 people said that their income range is between 0-Rp 5 000,00 5 people said that their income is between the range of Rp 10 000 000- 15 000 000 and 10 people said that their income is between 15 000 000- 20 000 000. The data given by the government shows that the income of the households is much lower than the incomes of the starbucks coffee participants. The income range of the participants were the amount they get monthly and the government statistics show how much they get annually in which is $4149 in the year 2009. The income range from the survey show that regular star bucks coffee customers, have higher incomes as compared to the customers who visit them less. And the customers with a higher income would be willing to pay a higher price for their favorite cup of coffee at star bucks. 40 % of the customers I had surveyed had rated the quality of the coffee at star bucks to be excellent, 60% had rated the coffee to be good. The customers who have higher income and visit star bucks more often and would be willing to pay more for their favorite beverage at star bucks, would be one reason to consider star bucks coffee as a Veblen good in Jakarta. According to my survey, the star bucks customers, with lower incomes, said that they would prefer to visit less often and make their own coffee since the cost of coffee at star bucks, is a larger proportion for them as compared to the customers with higher incomes.

The question of the survey where I asked the customers whether they feel that the amount they pay for a cup of coffee is worth it or not. And 26 of the 50 customers responded by saying that even though the amount they pay for a cup of coffee is not worth it, they would still come to star bucks since they like the atmosphere of each coffee joint. The question about the service at star bucks resulted in 70% of them saying that the service should be of a better quality because of the amount they are paying for each cup. 10 out of 50 customers who have a lower income would mind in paying more for a cup of coffee since it is a bigger amount of their proportion as compared to the people with a higher income.

It can be deduced that star bucks coffee is a Veblen good in Jakarta according to the income effect because people with a higher disposable income would be able to purchase starbucks coffee and people with lower disposable income, would not be able to purchase less of star bucks coffee which has a brand image.

Substitution effect:

The income effect is greater than the substitution effect in Veblen goods because, consumers would not want to switch to cheaper substitutes of other coffee brands. Substitute goods are goods that can replace the demand for another good or service