Product Quality in the Food Chain: Do Cooperatives Offer High Quality Products?

Cooperatives and investor-owned firms are alternative forms of business organisation that coexist and compete in many markets. The theoretical literature has identified a number of comparative advantages and disadvantages of cooperatives. Decentralized decision making within cooperatives may lead to quality coordination problems (free-riding on product quality), for example: whereas the individual member has to bear the full costs associated with higher quality, the benefits of delivering higher quality will be shared among all members. The present paper investigates this free-riding problem in determining product quality within a marketing cooperative in a vertically related market (food chain). On the basis of a mixed-oligopoly model, we show that the free-rider problem in the supply of high-quality products might be strong enough to ensure that cooperatives will never supply higher quality than investor-owned firms. Whether the cooperative can overcome the free-riding problem and supply a final product of high quality is shown to depend on the consumer’s valuation of quality, the costs of producing high quality, the way in which the quality of the final product is determined from the quality levels of the inputs delivered, the possibilities in controlling product quantity as well as on the number of members of the cooperative.