A conjectural variation approach to vertical integration in agricultural cooperatives

Abstract

Under the assumption that agricultural cooperative is a form of vertical integration, this paper, using conjectural variations, solves the profit-maximizing problem faced by the members in the multi-plant firm model in which they are vertically integrated with the agricultural cooperative. The average principle, the marginal principle, and the linear combination principle are derived for the competitive behaviour, collusive behaviour, and Cournot behaviour, respectively. The Nash equilibrium and economic efficiency in the cooperative system are then discussed. Finally, the model is numerically solved in an illustration. The marginal principle ensures the cooperative system to remain socially optimal in the competitive market.