Exposing agricultural cooperatives to competition

We examine the optimal regulation of agricultural markets when farmers have organized their activity in a cooperative which is the monopoly supplier of an upstream product and which competes with a single rival firm in selling a homogenous downstream product. The rival's marginal cost is private information and therefore the rival expects to earn an information rent. We show that the optimal access price discriminates against the private rival because rent is more valuable in the cooperative than in the private firm, and the regulator therefore sacrifices some cost efficiency in order to shift rents. Thus, while competition will benefit farmers, consumers and tax payers, the extent of competition should optimally be somewhat limited.