The International Consortium on Agricultural Biotechnology Research (ICABR)
On the relationship between seed and agbiotech companies:
licensing under alternative industry structure
In this paper, we analyze the characteristics of licensing agreements established between agbiotech and seed companies for the commercialization of GMOs. The objective is to show that the industry structure, and more particularly vertical integration, affects such agreements, the benefits of both types of contractors (agbiotech and seed companies) and the market share of the gm seed varieties. As a consequence, the model provides ground to explain the very high price paid by certain agbiotech (e.g. Monsanto) companies to acquire seed companies.
Property rights for conventional seeds are generally based on the Plant Breeders Right. In the case of GMOs, two property rights have to: the patents linked to the genetic event (e.g. the resistance to European Corn Borer in the case of Bt corn) and owned by the agbiotech company, and the property right concerning the seed variety and owned by the seed company. Evidence shows that the agbiotech company can hardly create ex nihilo a new and competitive seed business, and rather licenses the introduction and sales of the GM event to seeds companies. Evidence also shows that some agbiotech companies paid a high price for acquiring seed companies. One might think though that these acquisitions would lead to exclusive license practices (i.e. agbiotech companies licensing the use of the genetic event exclusively to their subsidiaries). However this intuition has not been confirmed empirically.
The objective of this paper is to analyze, on the basis of a theoretical model, the conditions under which agbiotech companies have interest both (i) to sign non exclusive licensing agreement, and (ii) to integrate vertically the seed business, even for a high price. Our model is based on a differentiated seed market. The suppliers are the seed companies who can possibly sign a license agreement with an agbiotech company in order to integrate a particular trait. Trade occurs during only one period. Decisions are taken in a three stages sequence: (1) the agbiotech company chooses its licensing strategy (i.e. exclusive vs non-exclusive; and the technology fee); (2) the seed companies choose their product portfolio, and in particular the variety in which they will introduce the genetic event; and (3) the seed companies choose their pricing strategy.
Various equilibria are compared depending on the industry structure: is the agbiotech company involved in the seed business through a seed subsidiary? are there different competing genetic events available from different agbiotech companies? The model enables us to estimate, for each equilibrium, how the surplus variation is distributed among the different categories of actors and the market share of GM seed varieties.