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Producers’ Cooperatives

24 April, 2015 - 15:59

Independent producers sometimes band together into a cooperative for the purpose of selling their products. The cooperative sets the price and assigns production quotas to individual firms. In effect, a cooperative acts as a legal cartel.

Because they violate the provisions of laws that outlaw such arrangements in most industries, producers’ cooperatives must be authorized by Congress. Farmers have sometimes been given such rights when they are confronted by monopsony buyers. For example, Congress granted dairy farmers the right to form cooperatives in the 1920s because they faced monopsony buyers. High transportation costs for fresh milk, together with economies of scale in processing milk, generally left only one dairy processor to buy raw milk from dairy farmers in a particular area. By forming a cooperative, farmers could counter the monopsony power of a processor with monopoly power of their own, creating a bilateral monopoly.

Today, with much lower transportation costs, dairy farmers can deal with a national market so that processors no longer have monopsony power. But dairy farmers continue to have the right to form cooperatives. As we have seen in an earlier chapter, dairy farmers also enjoy protection from federal programs that are designed to keep dairy prices high.

KEY TAKEAWAYS

  • A firm that has monopoly power in the supply of a factor makes choices in the same manner as any monopoly firm; it maximizes profit by selecting a level of output at which marginal revenue equals marginal cost and selling that output at a price determined by the demand curve. Unions have traditionally sought to raise wages and to improve working conditions by exerting market power over the supply of labor.
  • In bilateral monopoly, a monopsony buyer faces a monopoly seller. Prices in the model are indeterminate.
  • Professional associations often seek market power through their influence on government policy.
  • Producers’ cooperatives, a form of legal cartel, have been organized in some agricultural markets in an effort to offset the perceived monopsony power of some buyers of agricultural products.

TRY IT!

Consider the case of bilateral monopoly illustrated in Figure 14.8. Over what range of wages will employment be higher than it would have been if there was a monopsony buyer of labor but no monopoly in the supply of labor?

Case in Point: Unions and the Airline Industry

Unions represent 60% of the nonmanagerial employees of U.S. airlines. And labor costs make up one-third of airline costs. All employees have a stake in the success of the firms for which they work. That is certainly the case for the major unions representing airline employees. Both union leaders and airline management have much to gain from a relationship that benefits both employees and the airlines that employ them.

That sort of relationship has not always existed. In 1981, for example, Continental Airlines hired Frank Lorenzo, an airline entrepreneur, to run Continental. The airline had lost money the previous three years. Mr. Lorenzo promptly abrogated Continental’s contracts with employees, and told them that they could go back to work but only at sharply reduced wages. Continental’s pilots, flight attendants, and ground crews declared strikes against the airline. The airline was able to break the strike by hiring replacement employees. Even so, Continental declared bankruptcy in 1983. Mr. Lorenzo told striking employees that they could return to work, but they could do so only by agreeing to work at half their previous wage. Continental’s strategy of union suppression achieved reductions in wage costs, but those savings had a cost as well. A demoralized labor force produced dramatic reductions in the quality of service, and Continental was back in bankruptcy in 1991. In 1986, 6,000 members of the International Federation of Flight Attendants (IFFA) declared a strike against TWA. The airline followed a strategy similar to Continental’s and was able to break the strike by hiring replacement employees. After 10 weeks, the IFFA declared an unconditional end to the strike and sought to have its members rehired. It was not until three and a half years later that all 6,000 got their jobs back. Ultimately, TWA went out of business.

Not all airlines have had the same unhappy relationships with unions. Southwest Airlines, which started as a nonunion airline, now operates with a largely unionized labor force. It has continued its strategy of paying high wages and including employees in management decisions. The result has been one of the highest profit margins in the industry together with high productivity of both workers and aircraft.

Continental has also emerged as a “different” airline. More recently, it hired a new Chief Executive Officer who quickly returned the airline to profitability and established a new workplace culture in which employees were given a role in managerial decisions and were hired based in part on their teamwork skills. Continental has been able to shed its old reputation as a union suppressor and has established itself as an airline that works well with unions and has a minimal degree of conflict.

Another approach to dealing with airline employees has been to include them in ownership. United employees, for example, own the airline. Other airlines in which employees have had a substantial ownership role include Western Airlines, Eastern Airlines, Northwest, Delta Airlines, and United. In each case, employees exchanged equity for wage concessions. Each of these airlines implemented an Employee Stock Ownership Plan (ESOP). In each case, the program began with great optimism on the part of management and labor, but in CHAPTER 14 IMPERFECTLY COMPETITIVE MARKETS FOR FACTORS OF PRODUCTION most cases, conflicts between workers and their employers quickly emerged. Western and Eastern abandoned their ESOP programs after two years. While nearly all of the ESOP arrangements initially increased profits, none of them was accompanied by any structural change in the labor-management relationship. Ultimately, all of these plans generated disappointing results. Clearly, the mere creation of a system in which employees own a share of the airline is not sufficient; changes in the structure of the labor-management relations must occur as well. Some airlines have managed to prosper in a difficult economic world. The key to success seems to lie in the establishment of workplace culture that rewards good teamwork and efforts to enhance productivity. Airlines such as Southwest and the “new” Continental demonstrate that an airline can work effectively with unions, pay high wages, and still be profitable.

Sources: Jody Hoffer Gittell, Andrew von Nordenflycht, and Thomas A. Kochan, “Mutual Gains or Zero Sum? Labor Relations and Firm Performance in the Airline Industry,” Industrial and Labor Relations Review, 57: 2 (January 2004): 163–80; and Sandra L. Albrecht, “‘We are on Strike!’ The Development of Labor Militancy in the Airline Industry,” Labor History, 45:1 (February 2004): 101–17

ANSWER TO TRY IT! PROBLEM

Any wage negotiated between the monopsony (the firm hiring the labor) and the monopoly (the union representing the labor) that falls between Wm and Wu will lead to a quantity of labor employed that is greater than Lm. The portion of the supply curve below the negotiated wage becomes irrelevant since the firm cannot hire workers for those wages. The supply curve thus becomes a horizontal line at the negotiated wage until the negotiated wage intersects the supply curve; at wages higher than the negotiated wage, the existing supply curve is operative. Up to the quantity of labor at the intersection of the negotiated wage and the supply curve, the wage and MFC are the same. At any wage between Wm and Wu, the firm will maximize profit by employing labor where MRP and MFC are equal, and this will occur at a quantity of labor that is greater than Lm.