Economic Considerations in Forming Consumer Cooperatives and Establishing Pricing and Financing Policies

Abstract

This study identifies structural features of markets which provide inducements for consumers to form cooperatives, and derives conditions under which consumer welfare is enhanced through cooperation. Market‐failure conditions are discussed which may provide consumers with an economic incentive to form cooperatives.Also addressed, through application of a simple game theory model, are issues concerning optimal pricing, financing arrangements and cooperative stability. In this regard, it is shown that prevailing cooperative pricing and financial methods often tend to needlessly restrict output and membership and, consequently, cause unit costs to be higher than necessary in an increasing‐returns‐to‐scale environment, which it is argued, is the typical environment for most consumer cooperatives. Instability, in turn, tends to occur when cooperatives attempt to operate at outputs beyond those associated with minimum average cost because some members may reduce their patronage costs through formation of a new, smaller cooperative.