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The pricing and financial strategies of the cooperative: An adaptive expectations model
Abstract
The cooperative organization has unique financial and pricing characteristics. These characteristics require special financing methods and pricing decisions by cooperatives. Some financial economists believe that cooperatives are economically less viable than investor-oriented firms in facing adverse economic conditions. In addition to this, the cooperative system encourages overproduction in the market. A study was conducted to identify optimal cooperative financing and pricing strategies using a spreadsheet simulation. The cooperative financial and pricing strategies were tested by changing the values of the debt/equity ratio, interest rates, and the length of the revolving period. In the model, expected patronage refunds were based on actual patronage refunds through use of an adaptive expectation framework. Simulation results showed that the net earnings of the cooperative were large enough to permit the distribution of significant patronage refunds. Particularly under higher borrowing, the per-unit cash patronage refund was higher regardless of the length of revolvement, although longer revolving periods and lower borrowing, usually reduced the level of per-unit cash patronage refunds. Net earnings of the cooperative were implicitly controlled by the expected per-unit patronage refunds. To maintain the optimal level of surplus, the cooperative selected the value of the per-unit cash patronage refund, thereby affecting the expected per-unit patronage refund and the raw product price. This demonstrates how expected per-unit patronage refunds link the financing and pricing decision of the cooperative. Results also showed that cooperatives can overcome the economic burden of higher interest rates by extending the length of revolving period. This study showed that the financing and pricing strategies adopted by the cooperative during adverse economic conditions are useful in maintaining the economic stability of the cooperative. Patrons of the cooperative, by observing the raw product price, at least in the short run, limit their production. Consequently overproduction in the market can be eliminated.
Subject Area
Agricultural economics
Recommended Citation
Shihipar, Mohamed Lebbe Mohamed, "The pricing and financial strategies of the cooperative: An adaptive expectations model" (1997). ETD collection for University of Nebraska-Lincoln. AAI9815907.
https://digitalcommons.unl.edu/dissertations/AAI9815907