Cooperatives and Quality-Differentiated Markets: Strengths, Weaknesses, and Modeling Approaches

This paper analyzes the challenges and opportunities for agricultural marketing cooperatives in value-added, quality-differentiated markets. Product quality in all of its dimensions is critical in modern food markets, but various traditional cooperative business practices are not conducive to success in meeting consumers’ demands for quality. We discuss and evaluate these limitations, which have led to pessimism on the part of some commentators regarding the future of cooperatives, but we also demonstrate advantages, relative to investor-owned firms inherent in some traditional coop practices, such as revenue pooling. We also propose and illustrate appropriate modeling frameworks to study cooperatives’ performance in differentiated-product market settings, including comparing the performance of open- and closed-membership cooperatives in competition with an investor-owned firm in a market with horizontal product differentiation.