Cooperative Institutions as a Response to Market Failures in Private Goods Provision

* Article: MISSING MARKETS AND THE COOPERATIVE FIRM. By BRENT HUETH.

URL = https://www.tse-fr.eu/sites/default/files/medias/doc/conf/workshop_po/communications/brent_huet.pdf

Abstract

"Fixed costs limit opportunities for socially beneficial production and exchange in any setting where a firm’s consumers have private information about their individual valuations. A firm that is organized to maximize consumer welfare can expand the range of economic environments that support equilibrium production by requesting contributions from consumers prior to incurring its fixed cost. Further, committing to consumer interests ensures time-consistent pricing behavior, encourages demand revelation, and exploits the potential existence of other-regarding preferences. We use these results to interpret the emergence of cooperative enterprise as an endogenous institutional response to missing markets across a wide range of historical and sectoral contexts."

Excerpt

From the Introduction:

"Textbook discussions of market failure generally focus on external intervention as a potential remedy. Institutional responses that arise endogenously from among the affected parties are less well understood and documented. This paper considers cooperative enterprise as one kind of endogenous institutional response. We focus on settings where a profit-maximizing firm chooses not to enter a potential market, and show how a cooperative firm can support equilibrium production. We argue that this type of response is the genesis for much of the cooperative business activity that exists today. Consumer banking and insurance, retail grocery, news collection, farm credit supply, rural utility service, to name just a few examples, are settings where economic agents in the economy have used the cooperative firm structure to provide for themselves goods and services not available through more conventional means. Ostrom (1990) provides extensive evidence on endogenous institutional responses to market failures associated with common pool resources, and there is a rich literature associated with private provision of public goods (Bergstrom et al., 1986; Bagnoli and McKee, 1991). Our focus here is the private provision of private goods that investor-financed enterprise does not support."