On the Relative Disadvantage of Cooperatives: Vertical Product Differentiation in a Mixed Oligopoly
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We investigate the incentive to provide goods of high quality in a vertically
related market for different types of business organizations, a farmer-owned
cooperative and an investor-owned firm. Contrary to the firm, the
cooperative is characterized by decentralized decision making, which gives
rise to overproduction and problems coordinating the quality decisions of its
members (free riding). Comparing both manufacturers acting as monopolists
we show that the cooperative will never supply final goods of higher quality
than the firm, and that the problem of quality coordination is mitigated if the
cooperative succeeds in preventing overproduction. When a cooperative
faces competition of an investor-owned firm (mixed duopoly), it will –
except in one limit case – never produce final goods of a higher quality than
the firm and will deliver lower quality in a number of scenarios.