Cooperative versus non-cooperative spatial competition for milk

Although important, the spatial dimension is often neglected in studies of market power and competition in agricultural markets. This paper investigates spatial competition for raw milk between dairies under the presence of marketing cooperatives. Since observed in reality, our model is based on uniform delivered pricing and overlapping market areas. We compare spatial cooperative price matching with non-cooperative Hotelling-Smithies behaviour. Utilising a vector error correction model, we show that the observed low price transmission in Germany is in line with cooperative behaviour. This seems rational since it increases processors' profits. The abolition of the quota system may increase price transmission.