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

(42)     r_C^'>r_C^* and r_I^'< r_I^*

Regarding the total cost-reducing process innovation activity, the effect of cooperative
involvement depends on the relative quality of the products produced by the marketing co-op and the
IOF, the size of innovation costs, and the degree of farmer heterogeneity. In particular, the difference
between the total innovation activity in the mixed and pure duopsonies is given by:

It is important to note that the difference r_T^' - r_T^* is negatively related to p_C indicating that the lower is
the quality of the marketing co-op’s product, the more likely it is that cooperative involvement will result
in increased total process innovation in this market. When the relative quality of the co-op’s product is the

lowest (i.e., when p₁ - p_c approaches its maximum value of^tψ-—- under the co-existence of the two
^ψ

'*          '*

firms in stage 3), r_Τ> r_Τ ∀tψ. When p_I = p_C , r_Τ > r_Τ iftψ > 0.701444 , while, when the relative quality
of the co-op’s final product is the highest (i.e., when p_c - p₁ approaches t-t^ψ—É)), then r_τ > r* if

8tψ + 3

tψ > 0.914764 .

An interesting implication of these results is that the effect of marketing co-ops on innovation
activity is more likely to be negative when the co-op is the high quality firm. The reasoning is as follows.
When the co-op is the high quality firm, it receives a high price for its product and is able to raise more
capital for innovation activity in stage 1. Increased process innovation by the high quality co-op leads to
reduced costs and increased farm prices at the post-innovation stage of the game. Since innovation efforts
are strategic substitutes and the prices offered to farmers are strategic complements, the increased
innovation effort and prices of the co-op reduce the IOF’s incentive to innovate. The greater the relative
quality of the co-op’s product, the more likely it is that the increase in co-op’s innovation will be
outweighed by the reduction in IOF’s innovation and the total innovation activity will be reduced.

<<   <   14   15   16   17   18   19   20   >   >>