Producer Organizations, Bargaining, and Asymmetric Information

As pointed out by Sexton, a cooperative's pricing rule can be affected by divergent interests of heterogeneous members. When such competing interests are present, production decisions may depart from the first-best optimum, and the marginal cost pricing rule cum fee/rebate may no longer be implementable. In a recent article, Vercammen, Fulton, and Hyde study such departures assuming a con- tinuum of producers' types and a nondiscri- minating management board. While their sim- ulation analysis indicates that the first-best is sometimes attainable in such instances, their theoretical analysis seems to suggest it is not. This article extends the analysis of the in- centive problems faced in producers' orga- nization by assuming that the different farmer types constitute different groups with differ- ent bargaining powers. Departures from an equal sharing of the oligopolistic gain appear as long as the bargaining power of a group does not correspond to its relative importance in the farm population. However, when bargaining disparities are small enough, the quantities produced will still correspond to first-best levels, and incentive-compatible sharing of the oligopolistic gain can be effected by a mixture of two-part pricing and nonlinear cost recovery. When the less (more) cost-efficient farmers have sufficiently high bargaining power, the redistributive objective conflicts with efficiency and the organization overproduces (underproduces) compared to the first-best level. Moreover, the nonlinear scheme may be implemented by offering two two-part schedules, one with a unit price equal to the marginal revenue that members of the less powerful group choose, and the other with a unit price greater or lower than this level depending on the productivity of the most influential group.(This abstract was borrowed from another version of this item.)