Explaining Cooperative Enterprises through Knowledge Acquisition Outcomes

This paper develops a formal model of a cooperative enterprise which explains why cooperatives are present in such a large number of sectors. In our model of a multi-stage production process, we account for the possibility that producers can acquire knowledge to decrease their cost of production. We distinguish between knowledge that can be generalized among producers, and knowledge that cannot be generalized and therefore is idiosyncratic to each production site. We compare the cooperative's outcomes with simple models of a vertically separated market of autonomous producers and of a centralized hierarchy consisting of fully owned subsidiaries. To conduct a meaningful comparison, we establish equilibrium outcomes for knowledge acquisition, output, and profits generated in each organizational arrangement. From the comparison, we derive parameter constellations, under which the cooperative outperforms the market and hierarchy forms of business organization. This article contributes to the organizational economic analysis of cooperatives and provides a model that illustrates the competitive advantages of cooperatives in the market-hierarchy continuum.