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Ownership Structure and Endogenous Quality Choice: Cooperatives versus Investor-Owned Firms

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  • Hoffmann Ruben

    (Department of Economics, Swedish University of Agricultural Sciences)

Abstract

This paper examines how ownership structure affects endogenous quality choice and the subsequent equilibrium outcomes. Investor owned firms (IOFs) and producer cooperatives (COOPs) are analyzed within a duopoly framework including a primary and a secondary level. The firms play a two-stage game, first simultaneously choosing the level of quality to produce and then compete in prices. It is shown that if the cost of quality at primary level is fixed, and/or variable exhibiting non-constant returns to scale, firms can have a structural cost advantage due to ownership structure in addition to the high-quality advantage identified in the previous literature.In the case of a fixed cost of quality at primary level, it is shown that although IOFs charge higher prices they generate a larger consumer surplus than COOPs by marketing higher qualities. Cooperatives generate a larger producer surplus while the market share of the high-quality good is independent of ownership structure. In the case of a variable cost of quality at primary level, a cooperative firm possesses a structural cost advantage which is used to market larger quantities of higher levels of quality generating larger profits, larger consumer surplus and larger social welfare. Policy implications of the different structures are discussed.

Suggested Citation

  • Hoffmann Ruben, 2005. "Ownership Structure and Endogenous Quality Choice: Cooperatives versus Investor-Owned Firms," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 3(2), pages 1-26, December.
    • Handle: RePEc:bpj:bjafio:v:3:y:2005:i:2:n:8
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    References listed on IDEAS

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    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
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    Cited by:

    1. Pennerstorfer, Dieter & Weiss, Christoph R., 2012. "On the Relative Disadvantage of Cooperatives: Vertical Product Differentiation in a Mixed Oligopoly," Journal of Rural Cooperation, Hebrew University, Center for Agricultural Economic Research, vol. 40(1), pages 1-32.
    2. Agbo, Maxime & Rousselière, Damien & Salanié, Julien, 2015. "Agricultural marketing cooperatives with direct selling: A cooperative–non-cooperative game," Journal of Economic Behavior & Organization, Elsevier, vol. 109(C), pages 56-71.
    3. Azzeddine Azzam & Hans Andersson, 2008. "Measuring Price Effects of Concentration in Mixed Oligopoly: An Application to the Swedish Beef-slaughter Industry," Journal of Industry, Competition and Trade, Springer, vol. 8(1), pages 21-31, March.
    4. repec:hal:journl:halshs-01098762 is not listed on IDEAS
    5. Li, Kai & Zhou, Jie-hong & Liang, Qiao & Huang, Zuhui, 2015. "Food safety controls and governance structure varieties in China's vegetable and fruit sector," 2015 Conference, August 9-14, 2015, Milan, Italy 212046, International Association of Agricultural Economists.
    6. Pennerstorfer, Dieter & Weiss, Christoph R., 2007. "Do Cooperatives Offer High Quality Products?," 103rd Seminar, April 23-25, 2007, Barcelona, Spain 9403, European Association of Agricultural Economists.
    7. Schamel, Guenter, 2009. "Can German Wine Cooperatives Compete on Quality?," 2009 Conference, August 16-22, 2009, Beijing, China 51552, International Association of Agricultural Economists.

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