The development of a cooperative model to analyze the effects of differential member treatment

Abstract

<p>Cooperatives are becoming increasingly aware that to remain a competitive business form they must deal with the changing composition of their membership. Differential treatment of patrons is already used by noncooperatives and should also be considered by cooperative decision-makers as a possible operational strategy;The heterogeneity of cooperative members can be seen by looking at the different sizes, financial situations, and ages of the patrons. Although the cooperative membership can be categorized into many different groups, not all classifications can and/or should be used as a basis for differential treatment. The key to which classification systems can legally be used depends on whether there is a cost difference in servicing these patron groups. Many different methods of applying differential treatment are possible, however the most obvious ways are through prices, patronage refund policies, and stock requirements;Although there are many different ways to categorize and differentially treat members, the feasibility of any program depends on its adherence to the Rochdale Principles, its legality, and its acceptance by members. The principle of "operation at cost" is the keystone to the justification of any differential treatment policy. If each member is expected to pay only for the actual costs incurred by the cooperative in providing the service, then this infers that patrons can be differentially treated;Both a general model and an application of it are developed that enables the cooperative decision-maker to determine the effects of differentially treating members. Each member's profit function is specified and maximized subject to that patron's constraints. The cooperative firm's model includes submodels for the production-pricing and financial decisions. These two submodels are solved in a stepwise manner with the endogenous variables of the first submodel being the exogenous variables in the second. The levels of the endogenous variables of the second model are then used to make adjustments in the first. The Kuhn-Tucker conditions are derived and interpreted. These conditions provide the decision-maker with guidelines in maximizing both individual and cooperative profits.</p>