Antitrust, Marketing Cooperatives, and Market Power MATS A. BERGMAN Department of Economics, University of Umeå, S-901 87 Umeå, Sweden Abstract Marketing cooperatives are common in agricultural markets. This article explores their price and welfare effects and relates to antitrust legislation in the United States, the European Union, and some of the EU member states— in particular, Sweden. Welfare is higher with a monopoly cooperative than with a profit-maximizing monopoly, if the scope for price discrimination is small and if the world-market price is low relative to the domestic price. As the world-market price rises (or as price discrimination becomes more important), the welfare effect is reversed. The price-discrimination effect suggests that, as a marketing cooperative integrates vertically, welfare may fall. These results carry over to a duopoly with a cooperative firm and a profit-maximizing firm. In such a duopoly, the cooperative behaves more aggressively and obtains a larger market share. Empirical evidence sup- ports these conclusions. Keywords: producer cooperatives, vertical foreclosure, agricultural markets 1. Introduction A marketing cooperative is an arrangement that enables a large number of small sellers to coordinate strategies (such as price) when selling a good and to exploit returns to scale. This arrangement is normally considered legal and, in many cases, is actively promoted by the legislative authorities (cooperatives often have tax advantages), even though market- ing cooperatives have many features in common with marketing cartels. On the other hand, if we compare a cooperative with a firm that owns a large number of daughter firms, we may be more inclined to take the stance that antitrust legislation should not rule out marketing cooperatives per se. The basic difference—from an antitrust point of view— between the cooperative and the large firm is that, in the cooperative structure, the small units own and control the large unit; whereas in the normal corporate structure, the large unit owns and controls the small units. Cooperatives are most often found in the agricultural industry and in the early stages of the food industry but also occur in, for example, forestry and the pulp and paper industries in some countries. The standard transaction-cost economic explanation for the existence of agricultural cooperatives goes as follows (see, e.g., Rogers and Sexton, 1994): the opti- mally efficient scale in farming is much smaller than in the food-processing industry. If investor-owned firms purchase farm products from individual farmers, the farmers are in danger of being exploited. This is because relatively large amounts of transaction-specif- ic capital are tied up (sunk) in farm equipment, and there may only be one potential buyer of a certain product at a particular location. The differences in optimally efficient scales European Journal of Law and Economics, 4:73–92 (1997) © 1997 Kluwer Academic Publishers