TAKEOVERS AND COOPERATIVES:∗ Governance and Stability in Non-corporate Firms

If consumers wholly or partially control a firm with market power they will charge less than the profit maximizing price. Starting at the usual monopoly price, a small price reduction will have a second order effect on profits but a first order effect on consumer surplus. Despite this desirable static result, it has been argued that cooperatives are vulnerable to take-over by outsiders who will run them as for-profit businesses. This paper studies takeovers of cooperatives. We argue that there will not be excessive takeovers of cooperatives due to the Grossman-Hart problem of free riding during takeovers. Address for Correspondence David Kelsey, Department of Economics, University of Exeter, Rennes Drive, Exeter, Devon, EX4 4PU, ENGLAND. Keywords, corporate governance, cooperative, take-over, free-rider, externality. JEL Classification: D70, L20. ∗Research in part supported by ESRC grant RES-000-22-0650. We would like to thank the referees and editor of this journal for their helpful comments.