Mergers of Consumer Cooperatives

Problem definition: Consumer cooperatives are consumer-owned and managed enterprises that aim to achieve buyer power and maximize their members’ welfare. Recently, several cooperatives in major economies, such as the United Kingdom (UK), Italy, and Switzerland, have merged to increase their buyer power and achieve lower prices for their members. We analyze how these mergers affect market outcomes, consumer welfare, supplier profits, and social welfare. Methodology/results: We build a game-theoretic model of a two-tier supply chain where multiple consumer cooperatives procure a product from a market on behalf of their member consumers. Multiple suppliers produce for this market and can increase their supply by incurring a scale-up cost. We show that mergers of consumer cooperatives enable consumers to retain more income to purchase other goods, thereby improving consumer welfare. However, mergers also induce suppliers to reduce production, causing each consumer to receive less of the product supplied, thereby reducing consumer welfare. We find that this underproduction is even more pronounced in industries with low scale-up costs. Thus, we show that cooperatives merge and benefit member consumers only when the pre-merger number of cooperatives or the production scale-up cost exceeds a certain threshold. Despite the benefits to member consumers, mergers always harm suppliers, can harm other consumers, and reduce social welfare in the absence of substantial synergy gains. We further show that greater horizontal or vertical differentiation among cooperatives increases the benefit of mergers. Managerial implications: Mergers of cooperatives make a nuanced impact on consumer welfare and social welfare due to their effects on wholesale prices and production incentives. Policymakers should weigh mergers’ benefits for member consumers against their harm to other consumers and social welfare.