Spatial Competition of Milk Processing Cooperatives in Northern Germany

In this paper we develop a theoretical model of competition among marketing cooperatives (co-ops) in a spatial market setting assuming uniform delivered pricing and Löschian conduct. The model is an extension to Alvarez et al.’s (2000) spatial competition model for investorowned firms (IOF). Theoretical results include i) that the prices for raw milk are, ceteris paribus, higher in a pure market of coops than in a pure IOF market; ii) that even coops may imperfectly transmit price changes upstream; and iii) that the price farmers receive for their raw product is a function of economic space (distance times transportation costs) between coops. We test our theoretical findings for milk processing co-ops in Northern Germany using data of monthly average farm-gate prices for raw milk between 1999 and 2003 and estimating a reduced form regression model. Empirical results confirm our theoretical findings to a great extent.