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

19

Consider finally the effects of cooperative involvement when p_c - pI ≥ t(⅛t^ψ—— and the co-op
^{C I}    8tψ + 3

becomes a monopsonist at the post-innovation stage of the game (Table 4). Even though the effect of
cooperative involvement on total process innovation activity turns out to be, once again, ambiguous

_{'         *}                          1 - tψ

[ r_τ ≥ (<) r_τ when pC - pI ≥ (<)------], both firms pay higher prices in the mixed oligopsony than their

3ψ

counterparts in the pure oligopsony indicating that the presence of the co-op benefits all farmers at the pre-
innovation stage of the game. This is also true for the post-innovation stage since w_C^'₍₃₎ > w_C^* ₍₃₎ and
w_C^'₍₃₎ > w_I^*₍₃₎ +t. Thus, even though the presence of the co-op does not always result in increased innovation,
the price effect is such that the net returns associated with selling the product to the co-op is greater than the
net returns associated with selling the product to the two IOFs in the pure oligopsony. Figure 6 depicts both
the dominance of the co-op in the post-innovation stage and the farmer benefits from its presence.

6. Conclusions

This paper analyzed the market and welfare effects of cooperative involvement in cost-reducing, process
innovation activity. The open-membership marketing co-op considered in the analysis seeks to maximize
member welfare and addresses its property rights problems by financing its investment activity through
retained earnings.

Analytical results show that the involvement of the marketing co-op in cost-reducing process
innovation is welfare enhancing - the presence of the member welfare maximizing co-op is shown to result
in increased producer prices and welfare gains for all farmers, members and non-members of the co-op. In
terms of innovation activity, the effect of the marketing co-op on process innovation was shown to depend
on the relative quality of the products supplied by the co-op and the IOF, the degree of producer
heterogeneity, and the size of the innovation costs. Intriguingly, even though total innovation activity can fall
with an increase in the relative quality of the marketing co-op, the pricing strategy of the member welfare
maximizing co-op results in agricultural producers benefiting the most when the co-op is a high quality firm.

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