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



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maximizing marketing co-op. When compared to Firm C in the pure oligopsony, the co-op’s reaction
function (
RFC' (1) ) is shifted outwards and becomes vertical at pC -cC (recall that the optimal post-
innovation strategy of the co-op does not depend on the pricing of its rival IOF). At the same time, the
presence of the co-op causes the reaction function of Firm I to shift outwards in a parallel mode. The
result is that both firms in the mixed duopsony pay higher prices than the IOFs in the pure duopsony.
Since both prices are increased in the mixed oligopsony, all farmers, members and non-members of the
co-op, benefit from the presence of the co-op in the post-innovation stage of the game.

The effect of cooperative involvement on the welfare of producers in the pre- and post-innovation
stages of the game is shown in Figure 5. The greater the relative quality of the co-op’s product (i.e.,
pC- pI), the greater the producer welfare gains from the presence of the marketing co-op. Intriguingly,
even though total innovation falls with an increase in the relative quality of the marketing co-op, its
pricing strategy results in agricultural producers benefiting the most when the marketing co-op is a high
quality firm. Finally, it should be noted that the pricing strategy of the co-op and the reduced price-cost
margins under a mixed duopsony indicate that the involvement of the marketing co-op in process
innovation activity enhances competition and, thus, it enhances total economic welfare in this market.

After analyzing the case where both the co-op and the IOF are in the market in stage 3, consider
now the case where
pI - pc tψ-—- and the low quality marketing co-op exits the market at the post-
ψ

innovation stage of the game (i.e., xC(3) = 0 and xI(3)= 1 ; see Table 3). In terms of innovation effort, not
only does the high quality IOF that ends up being a monopsonist in the 3rd stage of the game innovate
more than each individual IOF in the pure duopsony, it undertakes more than the total innovation in the
pure duopsony. In terms of farm prices, similar to the case when both firms are in the market at the post-
innovation stage of the mixed oligopsony, pre- and post-innovation prices increase in the mixed market
indicating that the presence of the co-op benefits all producers, members and non-members of the co-op.



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