Takeovers and Cooperatives
If consumers wholly or partially control a firm with market power they will charge less than the profit maximising price. Starting at the usual monopoly price, a small price reduction will have a second order e¤ect on profits but a first order effect on consumer surplus. Despite this desirable static result, it has been argued that cooperatives are vulnerable to take-over by outsiders who will run them as for-profit businesses. This paper studies takeovers of cooperatives. We argue that cooperatives are in fact quite stable due to the Grossman-Hart problem of free riding during takeovers.
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