The formation of cooperatives with the implications of information sharing and contract farming

Although some cooperatives can provide an exclusive selling channel and impel information sharing among farmers, research on the formation of such cooperatives is limited. In this paper, we design a supply chain structure that includes a spot market operating with a quantity-dependent price setting accessible to all farmers, and a forward market accessible only to cooperative farmers. This enables us to analyse the conditions under which two pools of farmers are willing to form a cooperative, considering information sharing under competition. Compared to non-cooperative farmers, farmers in the cooperative can use the shared demand information to produce and sell products in the forward market. Interestingly, we find that information sharing would strengthen the intensity of quantity competition since the cooperative farmers overreact to the same signal. In addition, information sharing has a crowding effect: the expected value of information increases with the number of cooperative farmers. Thus, information sharing is a double-edged sword, which results in profit growth enabled by the crowding effect and profit loss due to quantity competition. We further show how the trade-off between the crowding effect and the quantity competition impacts farmers' decisions on whether to form a cooperative or not.