maximizing co-op. The case of a pure oligopsony is also analyzed and is used as a benchmark for
determining the consequences of cooperative involvement in cost-reducing R&D.
To analyze the effects of the involvement of marketing co-ops in cost-reducing process
innovation activity, our study follows the approach developed by G&F when examining the effects of
input-supplying co-ops. In particular, the strategic interaction between the firms in the pure and the mixed
duopsonies is modeled as a three-stage sequential game where: in stage 1, the firms compete in (input)
prices and a new process innovation that can reduce their processing costs is announced; in stage 2, the
firms determine their optimal level of investment in the new cost-reducing innovation; and in stage 3,
processing costs are fixed and the firms engage in (input) price competition. In what follows, stage 1 will
often be referred to as the “pre-innovation stage,” stage 2 as the “innovation stage,” and stage 3 as the
“post-innovation stage.”
To capture the geographic nature of agricultural markets (Rogers and Sexton, 1994), we assume
that, even though the two firms have market power when procuring the agricultural product, they are
price-takers downstream, i.e., in the markets they sell their processed products. In addition, to account for
the fact that agricultural products are used as inputs in the production of multiple food products, our
analysis allows for the final product prices to vary between the two firms, i.e., it allows for the two firms
to supply different value (quality) markets.
To avoid Nash equilibria involving non-credible strategies, the different formulations of the game
are solved using backward induction - the pricing behavior of the firms at the post-innovation stage is
considered first, the optimal investment in the cost-reducing innovation is analyzed next, and the solution
to the pre-innovation pricing problem determines the subgame perfect equilibrium amount of cost-reducing
R&D, the pricing of the agricultural product, and producer decisions in the pre- and post-innovation stages
of the game.
In addition to being intuitively appealing, this structure of the strategic interaction in the mixed
oligopsony enables us to explicitly account for the different objective function of the co-op (member
welfare maximization vs. profit maximization pursued by IOFs) as well as for the need of the co-op to