The International Consortium on Agricultural Biotechnology Research (ICABR)


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Intellectual Property and Market Structure in Agriculture.
Gordon Rausser, Suzanne Scotchmer and Leo Simon

Over the past decade the structure of the plant breeding and agricultural biotechnology industries has been radically transformed. Through dozens of mergers, acquisitions and strategic alliances, there has been a rapid and dramatic concentration of control over value-generating assets. As assets have been reshuffled, and in many instances newly created, much controversy has arisen. The content of the controversy has ranged from regulatory concerns about the exercise of market power, academic researchers' concerns about freedoms to operate, competitors' concerns about litigation threats, consumer concerns about genetically altered foods, and environmental concerns about insect resistance build-up.

Our goal in this paper is to shed light on this history of industrial consolidation. Consolidation is only one way among many of accomplishing the purposes served by vertical integration. The pharmaceuticals industry, for example, has witnessed a proliferation of exclusive licensing agreements. Why, then, has the trend towards consolidation in recent years has been so much more dramatic in agricultural biotechnology than in other, comparably knowledge-intensive industries? This topic is an important one for policy-makers and regulators responsible for safe-guarding competitive forces.

An obvious concern is that this trend may reflect a relentless quest for market power. Other, less sinister motivations for consolidation include the mitigation of contractual hazards and the exploitation of asset complementarities. While regulators are naturally unwilling to sanction the accumulation and exercise of market power, if this power results directly from innovation, U.S. patent and intellectual property policies allow such power to be exercised. Most analysts agree that consolidation should not be impeded if it allows synergies to be exploited, either in the realms of production or of innovation. However, if the pursuit of such synergies leads to an effective cartelization of the research and development process, a public policy response must be formulated that disperses access to the innovation market more broadly.

Our paper focuses particular attention on two striking developments in the industries under consideration and on the connection between these developments and the observed transformation in industrial structure. The first development is the evolution of more clearly articulated intellectual property rights to certain critical assets. The second is the transformation of traditional agriculture from what we call a *commodity* business to what we call a *differentiated product* business. In the former, products are homogeneous, and markets are anonymous and clearly delineated; moreover, from the perspective of a supplier, the value of a product is more or less exogenously fixed. In the latter, distinctions between products and boundaries between markets are blurred; moreover, value, to a large extent, must be ``created'' through the efforts of producers. There are intimate and complex relationships between these two developments, i.e., in intellectual property and product differentiation. As these developments unfold, regulators are navigating in uncharted territory. The analysis typically conducted to evaluate pre-consolidation conduct and behavior in a world of commodities provides little if any insight into conduct and behavior in a differentiated product world.

The empirical portion of the paper begins with a chronicle of all the consolidations that have taken place in the last five years. This is followed by a discussion of the change in the nature of intellectual property rights that has occurred over the last century: in the early decades of the century, innovations in agriculture were afforded very little protection; in recent years, however, changes in both legislation, case law and enforcement technologies have contributed to a situation in which innovators are better able to appropriate some of the rents generated by their activities. The final empirical section discusses in detail the nature of agricultural biotechnology assets, focusing in particular on the steps that producers must take in order to create and capture value.

In the theoretical portion of the paper, we construct a simple model of the biotechnology industry, oriented towards answering the following questions:

  1. how do the technological and legal developments described in the paper affect the incentives of firms in this industry to integrate vertically;
  2. how do these development affect the relative attractiveness of integration via contracting versus integration via consolidation? We demonstrate that in the very pristine setting of the model, intellectual property does affect incentives to vertically integrate, either via consolidation or contracting, in a world of differentiated products, but does not in world of commodities. Moreover, provided that agents have heterogeneous beliefs about future values of the endogenous parameters that determine industry profitability, there is a range of parameter values for which integration via consolidation will be profitable but integration via contracting will not be.