Strategic Entry of Farmers’ Cooperatives in Agricultural Markets

Abstract

Problem definition: In agricultural markets, farmers often face powerful investor-owned firms (IOFs) that dominate marketing and impose pricing pressure at the farm-gate. To counter this, farmers can form cooperatives (co-ops), which differ from IOFs in their objectives and transaction dynamics, to collectively enter the market. Although co-ops can be established with different membership structures, the impact of their potential market entry remains unclear, as does the question of which co-op type is more likely to succeed and perform better. Methodology/results: We propose a two-stage game-theoretical model to examine farmers’ strategic responses to a dominant IOF through the formation of a co-op, with either open membership, which does not restrict membership size, or closed membership, which regulates the size. Our results show that farmers will initiate co-op formation when the farm-gate price drops below a certain threshold. The mere threat that farmers may form a co-op can pressure the IOF to raise farm-gate prices, even when the co-op does not succeed in entering the market. We also find that the farmers’ response of establishing a co-op benefits both farmers and consumers by raising farm-gate prices, while simultaneously reducing consumer prices. However, these effects diminish when the market size is sufficiently small, where the co-op no longer poses a credible threat to the IOF. We compare the benefits of closed versus open co-ops and find that, although closed co-ops are better at gaining market access, open co-ops may be more profitable for farmers. Managerial implications: By quantifying the conditions under which it occurs, the findings illustrate and extend the “competitive yardstick” effect, where co-op entry pushes the IOF to offer better services for farmers. The result that co-op formation can simultaneously improve both farmer and consumer welfare is important for policy makers as they consider economic and regulatory frameworks for co-ops. History: This paper was selected as part of the 1RR initiative between the M&SOM journal and the MSOM Society. This paper was part of the 2025 MSOM Service Operations SIG Conference. Funding: This work was supported by National Natural Science Foundation of China [Grants 72371060 and 72293563]. The research of the third author was partially funded by the Australian Government through the Australian Research Council Industrial Transformation Training Centre in Optimisation Technologies, Integrated Methodologies, and Applications (OPTIMA) [Project ID IC200100009]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2025.0974 .