A Duality Approach to Testing the Economic Behaviour of Dairy-Marketing Co-operatives: The Case of Ireland

N80/07/98

A DUALITY APPROACH TO TESTING THE ECONOMIC BEHAVIOUR OF DAIRY-
MARKETING COOPERATIVES: THE CASE OF IRELAND

BY

G.E. BOYLE,

DEPARTMENT OF ECONOMICS,

NATIONAL UNIVERSITY OF IRELAND, MAYNOOTH,

MAYNOOTH,

CO. KILDARE,
IRELAND.

ABSTRACT

The main objectives of this paper are: (i) to establish whether Irish dairy marketing cooperatives
behaved “as if” they were profit maximisers over the period 1961 to 1987 and (ii) to determine the
response of the sector to the imposition of the milk production quota in 1984. The theory of the
cooperative managed firm (CMF) is first recast in a duality framework. The CMF differs from the
profit maximising firm (PMF) in (a) having as its objective the maximisation of the price paid to its
members for the raw material they supply and (b) being obliged to process all the raw material
supplied by its members. A formal test as to whether the Irish dairy-processing sector could be
characterised as “virtual” profit maximisers was implemented and could not be rejected. This
finding was reinforced by our finding that the elasticity of milk price with respect to the volume of
milk processed was zero. Milk price was found to be driven mainly by exogenous changes in the
price of processed output. The impact of the quota was to obviously reduce the level of processed
output but not proportionately. Our results suggest that every 10% fall in the amount of milk
processed reduces processed output of the sector by 6%. We also found a negative relationship
between the amount of the milk raw material processed and the demand for labour implying that
the introduction of the quota would not of itself have adversely affect employment in the sector.

JEL Codes: C39; D21; Q13; R3.

E-Mail: [email protected]

Tel: 353-1-7083751

Fax: 353-1-7083934

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