Pricing behaviour of cooperatives and investor-owned dairies in a spatial market setting Yvonne Zavelberg Hugo Storm Institute for Food and Resource Economics (ILR), University of Bonn

Yvonne Zavelberg 2 coop IOF conventional organic 137dairy processors 58 COOPs 82 IOFs t processed milk 21 Mio. t processed milk Motivation the German milk market in 2012

Yvonne Zavelberg3 AGENDAAGENDA 1.Relevant literature on spatial pricing in an oligopsony 2.Econometric specification 3.Presentation of results 4.Conclusion

Yvonne Zavelberg4 Relevant Literature theoretical analysis market actors conductpricing IOF COOP member policy & profit maximization COOP & IOF competitive yardstick theory Löschian competition equivalent to collusive behavior Hotelling-Smithies equivalent to Bertrand competition Free on board (FOB) farmer responsible for shipping Uniform delivered (UD) processor responsible for shipping space Farmer‘s and dairies dispersion in space Bounded line market Unbounded line market Importance of space depending on transport cost and distance between firms s=td in relation to output price s=td/p A B A B

Yvonne Zavelberg5 Relevant Literature theoretical analysis Relation price - space price s s s inverted U-shape pure IOF or COOP market UD & Lösch = price matching negative relation results under most combinations also for mixed markets positive relation IOF market FOB & Löschian comp. A B bounded line market unbounded line market A B 1 23 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 Interpretation Larger market area: increase price to cover farmers’ transportation cost Price decreasing in s Diminishing competition between firms

Yvonne Zavelberg6 Relevant Literature Studies analysing the milk market Alvarez et al IOF UD & Lösch unbounded line market inverted u-shape inverted u-shape empirically confirmed Huck et al 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) no theoretical analysis of spatial pricing in a mixed market inverted u-shape empirically confirmed no differentiation between legal forms due to fixed effects Tribl 2012IOF & 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 No empirical investigation

Yvonne Zavelberg7 Objective pricing behaviour of COOPs and IOFs in a spatial market setting literature review 1.spatial market power of IOFs/COOPs in North/South Germany data set covering 2001 to competitive yardstick effect overview of the theoretical relations between price and space found in the literature empirical estimation

Yvonne Zavelberg8 Empirical analysis variables & specification of estimation neighbouring share of COOPs wCOOP wOrg Num Neig s neighboring share of org. dairies absolute number of neighbours Absolute importance of space s=nDist*t Estimation restricted to conventional dairies, OLS regression Neighboursnearest dairies (also organic) that together produce at least as much as considered dairy Wrow standardized spatial weighting matrix nDistaverage distance of a dairy to its neighbours south coopperfyear performance index year dummycoop dummy south dummy

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 Yvonne Zavelberg9 Relation price - space results SouthNorth IOF

Yvonne Zavelberg10 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 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 Relation price - space Interpretation North/South SouthNorth IOF

Yvonne Zavelberg11 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 need to lower the price to cover transportation costs under UD pricing Relation price - space Interpretation COOP/IOF SouthNorth IOF

Yvonne Zavelberg12 significant negative effect of wCOOP on price consistent with lower price of COOPs (-0.65ct/kg) in the north Competitive yardstick Empirical evidence on the German market? north south significant positive influence of wCOOP on price supports the theory small effect of wCOOP on price zero to full coop share ct/kg north 0.24 ct/kg south conclusion

Yvonne Zavelberg13 in contrast to former studies we could not find an inverted U-shaped relation between price and space Conclusion pricing behaviour of COOPs and IOFs in a spatial market setting literature review empirical estimation competitive yardstick no clear empirical evidence support for the south opposite effect in the north effects are rather small from an economic perspective 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