||Firms may seek contractual alternatives to vertical integration in
order to achieve transactional economies or adjust for market imperfections.
Blair and Kaserman have shown that under fixed-proportions production technology,
firms within bilateral and successive monopoly market structures can use
formula price contracts to achieve results economically equivalent to integration.
This paper examines whether formula price contracts are a viable alternative
to forward integration for farmer cooperatives. Analysis of a three-stage
vertical market structure indicates that the conditions under which a cooperative
assembler can use a formula price contract are more restrictive than those
for an investor-owned firm.