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

THE EFFECT OF MARKETING COOPERATIVES ON COST-REDUCING

PROCESS INNOVATION ACTIVITY

Abstract - This paper examines the market and welfare effects of cooperative involvement in cost-
reducing process innovation activity in the context of a mixed oligopsony where an open-membership
marketing co-op competes with an IOF. The presence of the marketing co-op is shown to result in
increased producer prices and welfare gains for all farmers, members and non-members of the co-op. The
effect of the marketing co-op on process innovation activity depends on the relative quality of its final
products, the degree of producer heterogeneity, and the size of innovation costs.

Keywords: cooperatives, process innovation, mixed oligopsony, retained earnings.

Cooperative organizations constitute an integral part of the increasingly industrialized agri-food system

accounting for 25% to 30% of total farm supply and marketing expenditures (USDA, 2003). When

compared to profit-maximizing investor-owned firms (IOFs), a distinguishing feature of cooperatives (co-

ops) is that the owners are also the users of the services provided by the organization (USDA, 1995;

Hansmann, 1996). With members as both owners and users of its services, a co-op is typically assumed to
focus on maximizing member welfare rather than profits.

The economic ramifications of the different objective function of the cooperative organization
have received considerable attention in the relevant literature with the main focus being on the effect of
different types of co-ops on the equilibrium conditions of various Cournot and Bertrand mixed market
settings [see Sexton and Sexton (1987), Cotterill (1987), Sexton (1990), Tennbakk (1995), Albaek and
Schultz (1998), Fulton and Giannakas (2001), Karantininis and Zago (2001)]. A key result of this
literature is that the presence of co-ops results in more competitive conduct and increased welfare.

Being an integral part of the industrialized agri-food system, many co-ops have responded to the

pressures of the increasingly competitive market place by trying to position themselves via their R&D
activities. Important examples include Limagrain, Cebeco, and Cosun in Europe, while co-ops in the U.S.

such as Ocean Spray have had substantial innovation activity.

Recognizing the increased cooperative involvement in R&D, Giannakas and Fulton (2005) (G&F,
hereafter) examined the market and welfare effects of the involvement of input supplying co-ops in cost-

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