Pooling and the Yardstick Effect of Cooperatives

The article addresses the competition between supplier-owned-firms (Cooperatives) and investor-owner-firms (IOFs) when procuring raw commodities of different quality from agricultural producers. The cooperative pays a (partial) pooling price to all its members and retains no surplus, whereas the IOF pays farmers prices based on their quality and maximizes its profits. When there is an IOF duopsony, farmers gain no profits. In the case of a mixed duopsony, the low-quality producer delivers to the Cooperative, while medium and high quality producers sell to the IOF. This adverse selection is due to the pooling within the Cooperative. In the case of a Coop duopsony, producers randomize their outlet decisions. The mixed duopsony is an equilibrium market structure when reservation prices of consumers are sufficiently similar. Cooperatives will challenge the monopsonistic price setting of an IOF due to the farmers being residual claimants. Both the market share of cooperatives and the extent of payment differentiation inside a cooperative have a positive effect on the prices received by farmers.