The authors have addressed two main issues in the paper first, to test empirically the extent to which there is a positive relationship between increasing competition in the product market and technical efficiency and second, to estimate whether the size of the market share for both co-ops and conventional firms is influenced by their level of technical efficiency.
Before now little has been known about how competition affects producers cooperatives. However for conventional firms, a number of empirical studies have been done. These studies identify two mechanisms through which efficiency is improved in conventional firms first, competition from low cost entrant driving out the high cost incumbents and second, by incentive for management to improve efficiency.
Methodology Dataset
The paper is both theoretical and empirical in nature. The theoretical arguments are tested by the empirical evidence for Italian producers cooperatives. Theoretically, the authors argue that, cooperatives should not behave differently in response to increased competition as applied with a conventional firm because an erosion in co-ops competitive position will ultimately lead to the reduced profits to be shared among the cooperative members. However, it is possible to argue that if a co-op becomes highly efficient then it can lower its costs and ultimately gain dominant position in the market.
For empirical analysis the authors tested two hypotheses. The central hypothesis is that the state of competition in the product market should give cooperative members the incentives to improve the efficiency of operations. Obviously, this is possible as long as there is some initial inefficiency in the co-ops productive process that can be reduced as competition gets stiffer. In this type of organization, inefficiency can arise both in (a) the decision-making process and (b) the relationship between the workers and the co-op. In both cases the co-op will produce less than the optimal level of output. So, how can increasing product market competition reduce inefficiency in a producers co-op The competitive pressure may help to realign the individual members incentives to those of the cooperative.
A second hypothesis is that whether higher technical efficiency induces producers cooperatives to have a larger market share. Indeed, if a cooperative cuts the inefficiencies in its productive process, then it is capable to produce at a lower production cost and so gain a dominant position in the market. In other words, the relationship between a cooperatives market power and technical efficiency may be reverse.
These hypotheses are tested on a sample of Italian conventional and cooperative firms for the Wine Production and Processing sector over the time 19962001. The data-set has been extracted from AIDA, database collecting all the annual balance sheets of those Italian companies whose operating revenues are larger than 1 million Euros. So the database represents the universe of firms above this threshold. In addition to the information contained in the annual reports, the database reports information on companies location, their legal status and additional financial data. The initial data-set has been cleaned so to eliminate all the observations containing both missing and negative values, with final number of observations over the five years being 413. According to their legal status, 63 firms (corresponding to 250 observations over the whole time period) are cooperatives, while 40 firms (corresponding to 163 observations) are conventional firms. The wine industry has been selected for a number of reasons first, the firms output mix is limited compared to that of firms belonging to other sectors as they produce only wine. In addition, the number of cooperatives in the Italian wine industry has always been rather substantial and this implies that their market share has always been quite comparable to that of the conventional firms.
To estimate technical efficiency, the authors adopt the so-called frontier approach to the measurement of technical efficiency where (in) efficiency is computed as the distance from an estimated optimal benchmark, that defines the optimal amount of output that can be produced in a sector given the available technology (the so-called production frontier). The closer a firm is to the frontier, the more efficient it is. Second, by using dynamic panel techniques, the authors estimate whether the size of the market share for both co-ops and conventional firms is influenced by their level of technical efficiency in the attempt to evaluate the extent to which gains in technical efficiency allow a cooperative to increase its market share.
Conclusions
The authors have concluded that co-ops are systematically more efficient than conventional firms (may be because conventional firms are more capital intensive), co-ops and conventional firms use technologies with different capital-labor ratios, co-ops experience an improvement of technical efficiency following an increase in the market competition (with an increase of 1 of product market competition would increase co-ops technical efficiency by 0.4) and that level of efficiency does not impact the market share gained by conventional and co-ops firms. These results are obtained by using Maximum Likelihood Estimates which are different from zero at 5 level.
The authors argue that co-ops are well equipped to cope with increasing product market competition and one of the possible reasons for this may be their institutional structure which allows them to have some built in mechanisms that give them some slack that can be used to deal successfully with increasing market pressure. In other words increasing competition acts as a disciplining force for the co-ops membership indeed, market pressure implies a reduction on the share of profits co-ops members are entitled to and this may work as an incentive to cut inefficiencies (P.231).
Regarding the neutral impact of efficiency on the market size the authors say that this result may be due to many factors on the one hand, it is possible that the demand for wine is rather inelastic as in this specific market it is reasonable to assume that consumers develop loyalty to specific brands and therefore their demand is rather insensitive to variations in prices (P.231). Another possible explanation is that gains in technical efficiency can affect the market share only after some time. To check the second argument they used some lagged data of technical efficiency which did not produce any significant difference in the market share.
Critical Assessment
Data Assessment The data used for the analysis is taken from the Italian conventional and cooperative firms for the Wine Production and Processing sector over the time 19962001. The reason of taking Italian firms for the analysis is that its the home of one of the largest group of co-operatives with number of studies done over these firms so the results could be compared. However, this may bring some regional biasness in the results. The authors have tested the impact of regional variations within the Italy and found it to be insignificant but analysis over a larger region could produce more comprehensive conclusions.
The data taken are only for a specific type of cooperative firms (producers cooperatives) in one sector (the wine sector). Therefore further research is needed to test whether this positive relationship between increasing product market competition and co-ops technical efficiency still holds in other sectors and for other types of co-ops.
Assumption Plausibility One of the assumptions that authors made during the theoretical assessment of the topic is that, workers decide on the amount of effort they want to provide based on the wage they will get after the production has taken place and therefore, the workers will choose the level of effort that maximizes their own expected pay-off from the relationship with the cooperative, instead of the overall surplus and hence, the supplied effort is sub-optimal and the cooperative will appear inefficient while similar might not be the case with the conventional firms. The assumption can be flawed because even in a conventional firm a worker might shirk the work and choose the level of efforts to maximize hisher own pay-offs. The worker in a conventional firm might just try achieving the targets which would benefit himher only, even if there is a possibility to improve the bottom-line.
Contribution by the Paper The paper makes an important contribution to the assessment of the impact of increasing competition in product market on cooperatives. The topic of the analysis has been very popular in the context of conventional firms however, minimal contribution has been made in the context of cooperatives. The arguments made by the authors support the view that like any other type of firm, co-ops can devise strategies that can help them to compete successfully in what have become now global product markets and one of these is to reduce the internal inefficiency where it is possible.
Strengths and Weaknesses of the Paper The paper is highly structured, with detailed background to the basic question addressed and then following up with the comprehensive assessment of the empirical results and succinct conclusions. However, one of the major drawbacks of the paper is that it did not include more literature reviews of the papers done on co-ops efficiency. One of the possible reasons for this may be the lack of previous studies done over co-ops. The other drawback exists in dataset as explained above in data assessment section.
Alternative Approach to the Issue The question asked in the paper could have been approached in a different way too, such as Does a cooperatives unusual ownership and governance structure give it any advantage over its commercial rivals in an increasing competitive environment As in the paper the authors admits that the organizational structure of cooperatives play a significant role in its efficiency so the extent of this role could have also been checked by analyzing the above question. In a broader perspective rather than revolving around conventional or cooperatives the new approach can focus on the fundamental characteristic, organizational democracy, which generates incentives and motivation among workers inside the organization.