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



that the dairy-processing sector can be modelled “as if” it were behaving as a virtual profit
maximiser. It is also consistent with the finding reported by Higgins (1981) who estimated a cost
function for the sector in the only previous analysis of this type and found that the own-price
elasticity of demand for the milk raw material was not significantly different from zero.13

The elasticity estimates obtained with respect to the volume of milk materials yield interesting
results. Labour, for instance, is negatively affected by variations in the volume of milk employed as
a raw material so the introduction of the milk quota did not adversely affect its use. Processed
output is observed to fall by 6% for every 10% fall in the level of milk supplied for processing. The
labour-demand elasticity implies that every 10% of an increase in relative wages reduces
employment by about 4%. The elasticity estimates reported for non-milk materials (mainly energy)
are found to be statistically insignificant which may simply reflect their relatively small share of
total costs. The finding that labour and capital are complements is at first glance surprising.
However, the result may point to the limited usefulness of the
ceteris paribus assumption in this
case. The cooperative processing sector is driven by the supply of milk supplied to it by its farmer
members. Since labour is seen to be a substitute for the milk input the capital input is possibly
taking up the slack.

5. Concluding remarks

The motivation for this paper was twofold. First, we wanted to establish whether Irish dairy
marketing cooperatives behaved “as if” they were profit maximisers. On the face of it the alacrity
with which many dairy marketing cooperatives diversified their activities in the wake of the
introduction of the dairy quota in 1984 was consistent with profit-maximisation being a strong
behavioural motivation. It would have been impressive if these firms had simply diversified out of
milk processing into related agricultural activities. Not alone did this occur but many firms also
radically altered their ownership structure by becoming
Public Limited Companies while still

13 The author speculated that the reason for this unexpected result was that dairy-processing did not simply
minimise costs but minimised costs “... subject to paying the maximum price possible for its main raw material -
milk”.

17



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