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



reducing, process innovation activity. G&F show that the presence of the cooperative organization in an
oligopolistic agricultural input market (i) can increase total process innovation activity and (ii) enhances
economic welfare by reducing the prices of agricultural inputs.

An important feature of the input-supply co-ops studied in G&F is that they constitute a backward
integration of their members - i.e., they are formed by agricultural producers to produce inputs (such as
seeds, chemical fertilizers, pesticides etc.) used in agricultural production. Thus, the members/owners of
an input supply co-op are part of the demand side of the co-op’s market as they buy the product supplied
by the co-op.

Unlike supply co-ops that constitute a backward integration of their members, the other important
type of cooperative organizations, the marketing co-ops, constitute a forward integration of their
members. In particular, marketing co-ops are formed by producers to process and market the agricultural
produce of their members. Thus, the members/owners of a marketing co-op are part of the supply side of
the co-op’s market as they supply the co-op with an input in its production process.

Given the prevalence of these fundamentally different types of cooperative organizations, the
question that naturally arises is “
Does the type of cooperative organization matter when considering the
market and welfare effects of cooperative involvement in innovation activity?
” This paper will try to
answer this question by determining the effects of the involvement of marketing co-ops in process
innovation activity and comparing the results with those of G&F.

In particular, this paper examines the market and welfare effects of the involvement of marketing
co-ops in cost-reducing process innovation activity in the agri-food system. The paper analyzes the
consequences of cooperative involvement for the amount of process innovation, the pricing behavior of
firms, and social welfare in the context of a mixed duopsony where an open-membership marketing co-op
and an IOF compete in procuring an agricultural product from farmers. The agricultural product is an
input in the production process of the two firms and it is combined in fixed proportions with processing
services to produce the final products of the co-op and the IOF. By focusing on a mixed oligopsony, the
study pays particular attention to the impact of replacing a profit maximizing IOF with a member welfare-



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