Low-powered Strategic Incentives in Consumer Co-operatives under Mixed Oligopoly

The main aim of this paper is to derive properties of an optimal compensation scheme for traditional consumer co-operatives in situations of strategic interaction with profit-maximizing firms. Our model sheds light on the common belief that Co-ops are less prone than PMFs to pay variable bonuses to their managers. We show that this occurs under price competition when in equilibrium Co-ops prefer to pay flat wages to their managers whereas their profit-maximizing rivals adopt variable, high-powered incentive schemes. The main rationale is that, due to consumers'preferences, a Co-op is per se highly expansionary in term of output and, therefore, does not need to provide strong strategic incentives to their managers who then may expand output too much.