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

rely on earnings raised at the pre-innovation stage to finance its subsequent investment in cost-reducing
innovation. Note that the inability of open membership co-ops to restrict the allocation of benefits from an
investment activity to those members that have incurred the investment costs (i.e., their inability to
exclude from the benefits of an investment the members that have not contributed to the financing of this
investment), creates incentives for opportunistic behavior and free riding that undermine the co-ops’
ability to raise investment capital (Vitaliano, 1983; Cook, 1995). A common strategy employed by co-ops
to cope with this property rights problem is the financing of their investment through retained earnings
(see Knoeber and Baumer (1983). On the difficulties of open membership co-ops to raise investment
capital and the role of retained earnings in addressing various property rights problems see also G&F and
the references therein).

Other than facilitating the explicit consideration of these important idiosyncrasies of cooperative
organizations, this structure of strategic interactions makes our results directly comparable to those of
G&F. Given that both studies consider the market and welfare effects of cooperative involvement in cost-
reducing, process innovation, a comparison of our results will enable us to determine whether the type of
co-op (input-supply co-op considered in G&F versus the marketing co-op considered here) matters when
considering the effect of cooperative involvement in process innovation activity. As mentioned
previously, in addition to being involved in different activities, input supply co-ops differ from marketing
co-ops in a rather fundamental way - while the input supply co-ops constitute a backward integration of
their members, marketing co-ops constitute a forward integration of their members.

The rest of this paper is organized as follows. The next section examines the producer decisions
and derives the supplies faced by the duopsonists before and after the process innovation activity.
Sections 3 and 4 derive the equilibrium conditions in the pure and mixed oligopsonies, respectively.
Section 5 determines the effect of marketing co-ops on cost-reducing process innovation, the prices
received by agricultural producers, and the welfare of the groups involved. Section 6 summarizes and
concludes the paper.

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