The International Consortium on Agricultural Biotechnology Research (ICABR)

 

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Comparative analysis of market structure, R&D investment, and gains from innovation in the agricultural biotechnology and pharmaceutical industries.
By Anthony Artuso

Industry consolidation and expanded intellectual property protection have raised fears of potential abuses of market power by agricultural biotechnology companies. The principal concern is that essential technologies and intellectual property will increasingly be controlled by a few large companies. In this brave new world, many farmers may willingly abandon traditional varieties and accept legal and technological barriers to saving seed for next year’s crop, in exchange for the current benefits provided by high yielding transgenic crops. However, some consumer and farm advocacy groups believe that over time an increasingly monopolized market will reduce agricultural biodiversity, limit consumer choice, and leave farmers increasingly vulnerable to price increases by agricultural biotechnology companies.

Proponents of agricultural biotechnology argue that it will be the source of new and improved crops that are essential for feeding a growing world population in an environmentally sustainable manner. They argue that strong intellectual property protection is essential to elicit the investment needed to realize these potential benefits. The consolidation underway in the industry is simply a reflection of the increasing cost of developing and obtaining regulatory approval for transgenic crops. Even if industry consolidation does result in some market power and static efficiency losses, this will be more than offset by dynamic increases in welfare resulting from increased research, development and innovation.

While predictions of the future are difficult to impossible to prove and difficult to refute, it may be possible to gain some insight into the outlook for the agricultural biotechnology industry through comparative analysis with other industries. For several reasons it can be argued that the pharmaceutical industry may provide an indication of what might be expected as the agricultural biotechnology industry continues to mature. First, patent protection for transgenic crops is a relatively new development while well defined patent rights have been the norm in the pharmaceutical industry for several decades. In the field of crop breeding, public sector research expenditures are only now being eclipsed by private sector R&D spending. However, private sector expenditures have long exceeded government research funding in the development of new drugs. Health and environmental concerns are also beginning to create pressure to apply to transgenic crops some of the same regulatory scrutiny that has long been applied to new prescription drugs. In addition, the distinctions between the two industries are beginning to blur both as a result of mergers creating "life science companies" but also as a result of the rapid development of the market for nutraceuticals.

This paper proposes to evaluate the relationships between market structure, research and development expenditures and consumer and producer surplus in the pharmaceutical and agricultural biotechnology industries. Drawing on studies by Fuglie et al. (1996), Falck-Zepeda, Traxler and Nelson (1998) and Lichtenberg (1998a,b), a comparative analysis will be conducted of shares of consumer and producer surplus resulting from product innovations in the seed and pharmaceutical industries. In addition data on market share, price trend, and firm level R&D expenditure data for both industries will be compiled and analyzed to investigate and compare the intra-industry relationships between these variables. To help interpret the results of these comparative analyses and to highlight opportunities for further research, relevant intellectual property legislation and regulatory structures of the two industries in the U.S. and Europe will also be reviewed.

References

- Falck-Zapeda, J.B., G. Traxler and R.G. Nelson. 1998. Surplus Distribution from the Introduction of a Biotechnology Innovation. Working paper, Department of Agricultural Economics, Auburn University.
- Fuglie, K. N. Ballenger, K. Day, C. Klotz, M. Ollinger, John Reilly, U. Vasavada, and J. Yee. 1996. Agriculture Research and Development: Public and Private Investments Under Alternative Markets and Institutions. Economic Research Service, USDA, Wash. D.C.
- Lichtenberg, F. R. 1998a. Pharmaceutical Innovation as a Process of Creative Destruction. Working paper, Graduate School of Business, Columbia University, New York.
- Lichtenberg, F. R. 1998b. Pharmaceutical Innovation, Mortality Reduction, and Economic Growth. Working paper, Graduate School of Business, Columbia University, New York.