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Given the importance of price premium on price?s signals into the return of quality. This study examines the pricing mechanism for coffee in Mexico. The first stage analyses the current market channels focusing on potential imperfect competition among processors. This examination is focus on the failure of pricing mechanisms to send the appropriate price signals with regard to coffee quality. Building on the models of imperfect competition and market failure due to producer size, effect of these distortions on the relative price of Mexican coffee are estimated. The general objective of these studies are to examine the quality of coffee and its price differences in the market. The specific objectives are to develop a model which utilizes coffee quality to determinate price premium and determine whether game theory gives coffee farmers an instrument for determining quality for domestic and international coffee market. A series of models to analyze the effect of the market channel in pricing the quality of Mexican coffee are developed. A restricted form of channel analysis is used to analyze the potential for rent extraction through quality differentiation in Mexican coffee market.
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