Pricing behaviour of
cooperatives and investor-owned dairies
in a spatial market setting
Yvonne Zavelberg
yvonne.zavelberg@ilr.uni-bonn.de
Hugo Storm
hugo.storm@ilr.uni-bonn.de
Institute for Food and Resource Economics (ILR), University of Bonn
Motivation
the German milk market in 2012
137 dairy processors
58 COOPs
82 IOFs
200.000 t  processed milk
21 Mio. t processed milk
average raw milk price
coop
IOF
conventional
organic
Yvonne Zavelberg
BY
MV
NW
BW
NI
HE
TH
SN
ST
SH
RP
30.000
2
31.000
32.000
33.000
34.000
A
1.
Relevant literature on spatial pricing in an oligopsony
G
E
N
D
A
2.
Econometric specification
3.
Presentation of results
4.
Conclusion
Yvonne Zavelberg
3
Relevant Literature
theoretical analysis
market
actors
IOF
Free on board (FOB)
COOP
farmer responsible for shipping
member policy & profit maximization
pricing
processor responsible for
shipping
COOP & IOF
competitive yardstick theory
Löschian competition
conduct
equivalent to
collusive behavior
Hotelling-Smithies
equivalent to
Bertrand competition
Uniform delivered (UD)
Farmer‘s and dairies dispersion in space
space
Bounded line market
Unbounded line market
B
A
A
B
Importance of space
depending on transport cost and distance
between firms s=td
in relation to output price s=td/p
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4
Relevant Literature
1
price
theoretical analysis
s
Relation price - space
Interpretation
inverted U-shape
positive relation: competition in the backyard
raise price reduce market area, gain farmers
in backyard
negative relation: competition en route
Increasing shipping costs decrease market area
May lead to separated monopsonistic markets
pure IOF or COOP market
UD & Lösch
= price matching
B
A
unbounded line market
2
price
negative relation
s
results under most
combinations
also for mixed markets
Price decreasing in s
Diminishing competition between firms
B
A
bounded line market
positive relation
IOF market
FOB & Löschian comp.
price
3
Larger market area: increase price to cover
farmers’ transportation cost
s
Yvonne Zavelberg
5
Relevant Literature
Studies analysing the milk market
Alvarez et
al. 2000
IOF
UD & Lösch
unbounded line market
inverted u-shape
inverted u-shape
empirically confirmed
Huck et al.
2012
COOP
UD & Lösch
unbounded line market
assumptions as Alvarez et al. (2000)
inverted u-shape, lying above IOF
inverted u-shape
empirically confirmed,
difference to IOF not
Koller
2012
IOF & COOP
UD & Lösch
review of Alvarez et al. (2000)
inverted u-shape
no theoretical analysis of spatial pricing in a mixed empirically confirmed
market
no differentiation
between legal forms
due to fixed effects
Tribl 2012
IOF & COOP
UD & Lösch
bounded line market
analysis of simultaneous and sequential games
under different COOP membership policies
negative relation of price and space for all
scenarios
Yvonne Zavelberg
No empirical
investigation
6
Objective
pricing behaviour of COOPs and IOFs in a spatial market setting
literature
review
empirical
estimation
overview of the theoretical relations
between price and space found in the
literature
1. spatial market power of IOFs/COOPs in
North/South Germany
data set covering 2001 to 2012
2. competitive yardstick effect
Yvonne Zavelberg
7
Empirical analysis
variables & specification of estimation
Estimation
Neighbours
restricted to conventional dairies, OLS regression
nearest dairies (also organic) that together produce
at least as much as considered dairy
W
row standardized spatial weighting matrix
nDist
average distance of a dairy to its neighbours
s
Absolute importance
of space s=nDist*t
Num
Neig
absolute number
of neighbours
wCOOP
neighbouring
share of COOPs
wOrg
neighboring share
of org. dairies
perf
south
coop
year
performance index
south dummy
coop dummy
year dummy
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Relation price - space
results
North South
IOF
1. squared relationship not significant
2. positive linear relation price-space in the north
3. negative linear relation price-space in the south
4. effects only significant for COOPs
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9
Relation price - space
Interpretation North/South
North South
IOF
• competition in the backyard
reduce market area, gain farmers in backyard
• higher processing quantities
• larger distances between neighbours
Average distance: 33 km
Max distance: 91 km
Yvonne Zavelberg
• negative relation in line with theory of
competition between firms’ locations
• Increasing shipping costs decrease market area
• Diminishing competition between firms
• May lead to separated monopsonistic markets
10
Relation price - space
Interpretation COOP/IOF
North South
IOF
• North: COOPs pay a significant lower price then IOF (-0.65ct/kg)
• South: COOPs pay a slightly higher price then IOFs (0.10ct/kg) (not significant)
• open membership and the no-rationing assumption
•
•
COOP cannot reject a farmer who wants to participate
cannot choose the optimal market area like an IOF
• COOPS in the south might have a larger market area than IOFs despite the same
average distance to neighbours
•
Yvonne Zavelberg
need to lower the price to cover transportation costs under UD pricing
11
Competitive yardstick
Empirical evidence on the German market?
south
north
conclusion
significant positive influence
of wCOOP on price
significant negative effect of
wCOOP on price
small effect of wCOOP on
price
supports the theory
consistent with lower price
of COOPs (-0.65ct/kg) in the
north
zero to full coop share
-0.21 ct/kg north
0.24 ct/kg south
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Conclusion
pricing behaviour of COOPs and IOFs in a spatial market setting
literature
review
in contrast to former studies we could not find an inverted U-shaped relation
between price and space
empirical
estimation
significant different linear effects between price and space in the north and south
North
• relation between price and space is positive
• effects of competition in the backyard
South
• relation between price and space is negative
• in line with the theory of competition between firms’ location
competitive
yardstick
Yvonne Zavelberg
no clear empirical evidence
• support for the south
• opposite effect in the north
• effects are rather small from an economic perspective
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