Most agricultural markets show differentiated products and coexistence of cooperatives and investor-owned firms (IOFs). Some markets have low quality products provided by cooperatives, whereas other markets have high quality product provided by cooperatives. This article investigates the relationship between product quality and governance structure. We show in a non-cooperative game between farmers and enterprises that governance structure choices of farmers producing differentiated products depend crucially on the differential treatment of members regarding quality within a cooperative. The presence of cooperatives in a market has a competitive yardstick effect. Both the market share of cooperatives and the extent of payment differentiation inside a cooperative have a positive effect on the prices received by farmers.
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