THE EFFECT OF MARKETING COOPERATIVES ON COST-REDUCING PROCESS INNOVATION ACTIVITY

15

1. Table 4 presents the subgame perfect equilibrium for the case where the market structure is altered at
the post-innovation stage due to the exit of the IOF.

It is interesting to note that it is not necessary for the co-op to produce the higher quality product
for it to end up being a monopsonist at the post-innovation stage. Indeed, the relationship
pC - pI ≥ t(⅛t^ψ—— indicates that, for certain (low) values of the degree of producer heterogeneity and
^{C I}    8tψ + 3

the size of innovation costs, the presence of the marketing co-op can induce exit of the IOF at the post-
innovation stage even when the co-op produces the lower quality product, i.e., when p_C < p_I .

5. The Market and Welfare Effects of Cooperative Involvement in Process Innovation

Having determined the subgame perfect equilibrium conditions for the pure and mixed oligopsonies, we
can now examine the ramifications of cooperative involvement for cost-reducing process innovation
activity, pre- and post-innovation agricultural producer prices, and the welfare of the groups involved. We
begin by considering the general case of the mixed duopsony at the post-innovation stage of the game.

Figure 2 graphs the innovation reaction functions of the firms in the pure and mixed oligopsonies.
When compared to the reaction function of Firm C in the pure oligopsony (RF_C(2)), the reaction function
of the co-op ( RF_C^' ₍₂₎ ) is shifted outwards and rotated rightwards. The co-op has increased incentives to
innovate because, by seeking to maximize the welfare of its members, it is better able to internalize the
cost and benefits associated with its process innovation activity.

At the same time, the cooperative involvement reduces the marginal profitability of the IOF’s
investment in innovation by increasing the equilibrium agricultural product prices. Graphically, the
involvement of the co-op results in the reaction function of Firm I (the IOF in both the mixed and pure
oligopsonies) shifting inwards in rightward rotation. These changes in the reaction functions result in
increased innovation by the co-op relative to Firm C in the pure duopsony and reduced innovation by
Firm I in the mixed duopsony case, i.e.,

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