Abstract
In this paper, we analyse the nature of the relationship between market power and technical efficiency for producers’ cooperatives. More specifically we test two hypotheses: first, we evaluate the extent to which increasing market pressure may help producers’ cooperatives to improve technical efficiency to guarantee positive profits; second, we test whether higher technical efficiency induces producers’ cooperatives to have a larger market share. These hypotheses are tested on a sample of Italian conventional and cooperative firms for the Wine Production and Processing sector, using both frontier analysis and dynamic panel techniques. The results support the hypothesis that increasing market pressure can affect positively the cooperatives´ efficiency, while gains in technical efficiency do not seem to have any impact on the cooperatives’ market share.
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Notes
For the remainder of the paper, we will use the terms cooperatives and producers’ cooperatives interchangeably.
Alchian and Demsetz (1972) claim that teamwork is often productive but makes difficult to observe individual effort; this implies that unless pay is closely tied to effort, team members have the incentives to shirk, unless a monitor is appointed that manages the firm and that pays out wages based on estimated effort.
This may be due to several factors, some of which are related to economic policy (like the reduction of tariffs and other artificially created barriers to entry) and some to the consumers’ tastes.
Authors tend to avoid specifying two different production functions for either the conventional and the cooperative firms as long as these belong to the same sector.
Indeed, we have performed an Hausmann test on a simple production function specification where our variable COMP appeared among the regressors. The results of the test show there is a potential issue with the endogeneity of this variable.
We thank an anonymous referee for this comment.
Unfortunately we cannot perform dynamic panel unit root tests. Indeed at the moment they can be carried out only on longer time series we have. However, the estimation of an AR(1) for market share shows that the coefficient of the lagged values of the market share is 0.97 suggesting there is a potential problem with the presence of a unit root. Therefore we decide to run the model with the first-differenced dependent variable.
The firms classified in this sector include firms that both grow and process grapes to produce wine. For the remainder of the paper, we will refer to this sector interchangeably as the wine sector or wine industry.
More information on this database can be found at http://www.bvdep.com/browse5.asp.
In particular, the firms (both co-ops and conventional) included in our sample are specialised in the production of medium quality wine.
The IO literature suggests to use either industry-level (like the size of economic rents in the industry) or firm-level (like the inverse of a firm’s market share) measures of the degree of competitive pressure in the product market. However, industry-level measures can be distorted by both risk and accounting conventions and therefore firm-level measures are usually preferred (see Greenhalgh and Rogers 2004; Hay and Liu 1997).
However, it is important to recall that for the cooperatives the partial output elasticity formulas are different. For instance the output elasticity to labour is computed as \( \begin{aligned}{} & \beta _{3} + 2\beta _{6} \ln L + \beta _{8} \ln K + \beta _{9} \ln M + \rho _{3} {\text{COOP}} + \rho _{6} \ln L*{\text{COOP}} + \\ & \rho _{7} \ln K*{\text{COOP}} + \rho _{9} \ln M*{\text{COOP}} \\ \end{aligned},\) where β 3 + ρ 3 can be interpreted as the output elasticity of labour for cooperatives evaluated at the geometric mean of the sample.
It is quite difficult to get information on the number of seasonal workers in the wine sector at national level. It is only possible to get some scattered information about single regions: for instance in Piemonte (where the wine production is quite important) up to 45% of co-ops’ workers are seasonal workers (Aimone et al. 2002).
Indeed, the average annual increase of the wines’ consumer’s price has been equal to 2.4% (more or less like the annual inflation rate) over the time period we consider for our empirical analysis.
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Acknowledgements
We want to thank Toke Aidt, Sergio Destefanis, Pasquale Lombardi, Mario Padula and Virginie Perotin for very valuable comments on previous versions of the work. We want also thank the CSEF, University of Salerno, Italy for kindly providing the data. The usual disclaimer applies.
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Maietta, O.W., Sena, V. Is competition really bad news for cooperatives? Some empirical evidence for Italian producers’ cooperatives. J Prod Anal 29, 221–233 (2008). https://doi.org/10.1007/s11123-008-0100-z
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DOI: https://doi.org/10.1007/s11123-008-0100-z