Stable producer co-operatives in competitive markets

An argument often adopted to explain the relatively scarce presence of Producer Co-operatives (PCs) in Western capitalist economies is the instability that may affect this type of firm during the positive phases of the business cycle. In a nutshell the argument is that in profitable industries PCs can have an incentive to hire fixed-wage workers to replace the relatively more expensive firm's members. The paper shows that this phenomenon can fail to hold in very competitive and low barrier-to-entry markets in which, potentially, dismissed members have a chance to set up new firms. Furthermore, since some basic results on PC's stability are due to the assumption of an exogenous equilibrium wage as opposed to an endogenous PC's payoff, the paper attempts to remove this assumption. Two main insights are thus provided. Firstly, that workers possess an incentive to set up PCs only under specific circumstances. Secondly, that once PCs enter a market, conditions exist under which they are stable against the temptation to dismiss members to hire fixed-wage workers.