Abstract: This paper develops game-theoretic models of heterogeneous consumers to analyse the effect of cooperatives on quality-enhancing product innovation activity, the pricing of food products and the welfare of the groups involved, in the context of a mixed duopoly where an open-membership consumer co-op competes with an investor-owned firm in markets for horizontally differentiated products. Analytical results show that the involvement of the member welfare-maximising co-op in innovation activity can change the nature of product differentiation and the structure of the market, and be quality and welfare enhancing by increasing innovation activity and reducing the prices of food products. The effects of co-operative involvement are shown to depend on the degree of consumer heterogeneity and the size of innovation costs.

　　Keywords: Cooperatives;economic welfare;horizontal and vertical product differentiation;mixed oligopoly;product innovation;retained earnings

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