The World of Boba Tea — An Example of Monopolistic Competition

Back in 2008, getting a cup of boba tea in Los Angeles was not an easy task. Now in 2022, there are areas in Los Angeles with ten boba tea shops in a three-block radius. Recently, I was at a small strip mall in the San Gabriel Valley with probably around 15 stores in it, three of them were some variety of a boba tea shop. For those who might not be familiar, traditional boba tea refers to a type of sweet milk tea with chewy tapioca pearls (which is the boba). But now it has grown into an all-encompassing name for a variety of tea and fruit drinks with or without boba. It is interesting to see how boba tea grew to be such a big phenomenon in the United States. Here, I will give a quick look at its history and then examine it as a case of monopolistic competition.

Boba tea originated in the 1980s in Taiwan, although its specific origins in Taiwan are debated. It quickly spread all over Asia and then to the United States. In the U.S., boba tea started off as a drink offered only in Chinese restaurants. But it quickly gained traction through the Asian immigrant population, and thus stores specifically selling boba tea started to open. Lollicup, Ten Ren, and Tapioca Express were one of the first boba tea shops that opened in the U.S. as early as the 2000s. Some of these shops were chain stores of big boba places in Asia, like Ten Ren which originated in Taiwan. Others were founded in the United States, like Lollicup headquartered in Chino, California. In merely a few years, the boba tea market grew tremendously as the U.S. acquired a larger Asian population. The U.S. Census Bureau estimated the Asian population to be the fastest-growing ethnic group in the U.S. from 2000 to 2019, at a rate of 81%. More of an Asian population meant there was more demand for boba tea, thus more and more boba tea shops appeared. Of course, the demand did not only come from Asian and Asian Americans. Social media contributed to the popularity of boba tea as not just a product but a lifestyle. Recently, in 2019, the boba tea market was estimated to be valued at $2.1 billion dollars according to a market analysis report on Grand View Research. And it doesn’t stop there. The market is projected to reach $3.39 billion dollars by the end of 2027 (same report).

The boba tea market is an example of monopolistic competition. Monopolistic competition is a type of market in between perfect competition and monopoly. A few characteristics of it are many sellers, similar but slightly differentiated products, high elasticity of demand, and low barriers of entry. Indeed, there are massive amounts of sellers of essentially pretty similar products, especially in areas with high Asian populations like Los Angeles. However, the boba tea industry quickly evolved by differentiating its products because of the intense competition that firms face. A decade ago, boba tea was tea with milk powder and boba pearls. Then, it evolved into boba tea with different flavors, like taro milk tea, which involves an intense purple food coloring. The picture on the left shows just how much variety there is. Other varieties include tea with fruit syrups or real fruit, milk with brown sugar boba, fruit smoothies, etc. Not only did they differentiate themselves with different types of tea, but also with the type of toppings in the tea. There is coconut jelly, grass jelly, taro balls, cheese foam toppings, and so much more.

Each shop would try to differentiate itself by offering a different variant of boba tea and market itself as such. However, because a lot of stores do still offer similar products, there are lots of substitutes. Thus, the elasticity of demand is high. The elasticity of demand is how much consumers respond to price changes, and high elasticity of demand means that consumers are susceptible to price changes. A change in price will cause a big drop in demand. This makes sense because if there are lots of substitutes, a consumer can switch places if their go-to boba shop increases in price. This is also proven by looking at the prices of boba shops. Usually, the price of a standard cup of boba tea is around $5.00 dollars in Los Angeles. Of course, by creating drinks that are their own specialty, they are able to set the price at a premium. That is the benefit of differentiating. For example, at BenGong’s Tea in Arcadia, Los Angeles, they charge as much as $6.50 for a Peach Oolong Milk Tea with a cream top. Lastly, it has a low barrier to entry because it doesn’t have a high fixed cost. It does not cost too much to rent a storefront and start selling boba. So the boba tea market is a relatively competitive and cut-throat industry where you have to differentiate yourself through innovation and marketing techniques to compete with the hundreds of other boba shops.

In terms of differentiating and targeting different customers, the boba places in Los Angeles seemed to have done very well. There are two different types of boba shops that target two different target consumers. One type has adapted to the American taste and one is an exact replica of boba tea places in Mainland China. Some representatives of the “Americanized” boba tea I have identified are Boba Guys, Boba Time, and Lollicup. These are the ones that sell varieties of boba tea like matcha, taro milk tea, Thai tea, horchata milk tea, etc. These places offer innovation that combines milk tea with things that are already well known in the United States so that it is more easily accepted. These places target a more Americanized audience. The Mainland China type of boba places are easily identifiable by the fact that their menu is largely in Chinese with English in tiny font on the bottom. These places are targeted toward people who came from China and moved to the United States for school or work. And these places will have products with toppings that are not commonly found in the United States. For example, one of my all-time favorite drinks is osmanthus jasmine milk tea with fermented rice and rice balls. A consumer that is unfamiliar with Chinese food culture will probably not know what half of the thing in there is. They even further target their customers by differentiating their packaging. The picture on the right shows Ben Gong’s tea milk tea cups that are decorated with ornate traditional Chinese drawings.

The boba tea industry was a market fueled by the diaspora of culture through immigration. It also is an example of an industry that quickly adapted to the needs of its consumers. At first, its needs were to provide for a largely Americanized demand. Then, as more and more internationals opted to come to the U.S., there were more and more boba shops that were replicas of what they would get in their hometowns. This is largely attributed to the fact that the industry is a monopolistic competition. With fierce competition comes the need for firms to adapt, innovate, and provide the best product for their customers.