The International Consortium on Agricultural Biotechnology Research (ICABR)



Agricultural Biotechnology and the Theory of Contestable Markets


Morteza Haghiri, University of Saskatchewan, Canada





Progressions in biotechnological research have changed the types of problems being faced by world agricultural sectors. These recent alterations have come from changes in agricultural systems that are producing or using various series of crops, animals and microbes which have been developed using new biotechnology methods or involve input and output attributes that use genetic modification. As Phillips and Buckingham (2000) point out, by the end of 1999 more than 40 genetic modifications related to 13 different crops were approved and produced in one of 12 countries and to varying degrees were available to other countries through international trade. A number of countries have also approved release of one or more varieties of genetically modified fish (e.g. salmon), trees (e.g. poplar), microbes and vaccines (e.g. rBST and various vaccines for animals). A large number of organisms with new modifications await regulatory approval in various countries involved in the international food trade.

With the introduction of biotechnological products into various world agricultural systems, a new branch of economics associated with serious debate has been discussed. New terminologies such as intellectual property rights (IPRs), food safety, regulations, and public acceptance have been added (Haghiri, 1999). Beyond each of these new fields, there exist some basic theories of economics. Out of the theories, this paper endeavors to address the theory of contestable markets to agricultural biotechnology.

The importance of entry to the competition process has been recognized for a long time. Demsetz (1968) and Baumol, et al. (1982) emphasize that industries with only a few firms (or just one) can be very competitive if there is a threat of entry by other firms. Markets in which many firms can enter rapidly if prices exceed costs or can exit rapidly if prices drop below costs are called contestable. As Baumol et al. (1982) explain firms are reluctant to enter an industry if it is very costly to exit.

The market structure in agricultural biotechnology is another issue that is also discussed in this paper. In practice, the number of firms in market and the ease of entry by new firms determine the structure of the market. As date, there is consensus that no contestable market exists in agricultural biotechnology, however, the spillover of the benefits gained from biotechnological products makes an undeniable concern about the future relation between the contestable markets with agricultural biotechnology in the long run.

This paper is broken down into four main sections: The first section explains the role of agricultural biotechnology products in the market. Section 2 discusses the theory of market structures and determines the spatial place of the contestable market theory in that structure. Section 3 proposes and analytically describes a model to show two things: in the first phase of the long- run, agricultural biotechnology companies faced with contestable market principles compare their principles to what exists currently, and that ultimately in the last phase, the competitive market structure is the dominant one. This result will not arise if some presumptions are made. Finally, Section 4 concludes the remarkable points.




-Baumol, W. J., Panzar, J. C., and R. D. Willig, (1982), "Contestable Markets and the Theory of Industry Structure", New York: Harcourt Brace Jovanovich.

-Demsetz, H., (1968), "Why Regulate Utilities?", Journal of Law and Economics, Vol. 11, pp.55- 65.

-Haghiri, M., (1999), "The Economical Impact of Using Agrotechnology in Agricultural Developing Economies", Paper presented in the "International Conference on Agropoles and Agro-industrial Technological Parks", Barretos, Sao Paulo, Brazil, Nov.15-21, 1999.

-Phillips, P. W. B., and D. Buckingham, (2000), "Agricultural Biotechnology, The Environment, and International Trade Regulation: Your Place or Mine?", Paper presented to the University of Saskatchewan Conference on "Globalization and New Agricultural Trade Rules for the 21st Century", Saskatoon, Saskatchewan, Feb. 13- 14, 2000.


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