Quality Provision and Farmer Inclusion of Agricultural Cooperatives

The paper aims to analyze the quality provision and inclusion of farmers by a farmer-owned cooperative (co-op) when it competes with an investor-owned firm (IOF). A model of mixed oligopsonistic competition is developed to capture the endogenous participation of farmers who are heterogeneous in their efficiency to provide quality. The results highlight an advantage of the co-op: by imposing a similar quality standard to the one imposed by the IOF, the co-op may drive the IOF out of the market. Due to this advantage, it is more likely that the co-op will set a high quality standard when the minimum quality standard is costly to farmers. This advantage, however, may induce an inefficient outcome if providing a high quality product involves a high fixed cost.