Pooling and the Yardstick Effect of Cooperatives
Abstract: Most agricultural markets show differentiated products and coexistence of cooperatives and investor-owned firms (IOFs). We highlight a difference in the price policy and the objective function between these governance structures. The IOF charges different procurement prices from the farmers based on their quality and maximizes its profits, whereas the cooperative pays a (partial) pooling price to all its members and retains no profits. Three markets are analysed: IOF market, mixed market, and cooperative market. We show in a non-cooperative game that the low (high) quality farmer(s) supply to the cooperative (IOF) in the mixed market. The choice of outlet, i.e. cooperative or IOF, results in the mixed (cooperative) market being an equilibrium market structure when the sunk costs of erecting a governance structure is above (below) a certain level of the extent of product differentiation. The competitive yardstick effect of cooperatives arises as an externality of the governance structure choices. Both the market share of cooperatives and the extent of payment differentiation inside a cooperative have a positive effect on the prices received by farmers.
