February 11, 2010
Competition in Agriculture Symposium: Comments of Kyle Stiegert
Posted by Kyle Stiegert (University of Wisconsin, Agriculture and Applied Economics)
Over just 15 years, the development of seeds for corn, soybean, and cotton farmers have changed from a traditional breeding approach to a system that involves breeding with the insertion of numerous combinations of genetically modified seed traits that offer specific on-board services to the plant. These traits are patented by just a few biotech firms, which have accessed the seed sector through both vertical integration contracting.
Seeds are developed to perform within different regional agro-climactic zones. When a biotech firm owns a downstream seed subsidiary, the strategic considerations of the spatially differentiated market become quite complex. For example, perhaps the biotech firm wants to control a regional market in which they own a high-performing seed with their own GM traits. To achieve success, the GM firm could just work hard to fairly market the seed while licensing their GM traits to any other firm that would in turn produce a strong competing seed. Alternatively they could:
control which combinations of GM traits are allowed in competitor seeds,
- limit how their GM traits are stacked with competitor GM traits.
- limit the use of their GM traits in higher performing competitor seeds
- set the technology fee on licensed traits high enough that their subsidiary seed company has a price advantage in the final goods market.
These and other possible strategies open the door to many legal and economic questions about limits of patent rights, abuse of dominance, and market foreclosure. I expect that the DOJ/USDA hearings will begin to unravel many of the complex issues involving GM technologies and their evolving markets. I believe we need to look at the welfare effects on farm producers in this case and not on consumers. Consumer welfare effects would be extremely difficult to measure with any accuracy.
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Kyle: I am interested in your claim that we should look at farmer welfare to measure competitive effects. I raised a question in response to Jeff's post (http://lawprofessors.typepad.com/antitrustprof_blog/2010/02/competition-in-agriculture-symposium-jeff-harrison.html#comments) relating to this to which I wanted to draw your attention.
Mike and Jeff: Indeed, this is a great point. I see it as an important starting point for addressing Kyle's claim at the end of his post that we should look at farmer welfare rather than consumer welfare in assessing competitive effects of seed manufacturer conduct. He claims that consumer welfare effects would be hard to measure. Given this point, however, I'm not so sure farmer welfare effects would be any easier to measure (and, as an aside, I would note that looking for one's keys where the light is better because it's hard to see where they were actually dropped is rarely a good strategy). Thoughts?
Posted by: geoff manne | Feb 11, 2010 9:13:28 AM
My point about consumer welfare has a lot to do with understanding transmission of pricing at the ag input level through the supply chain and to the retail market. One could certainly envision that such transmissions for permanent structural price shocks would eventually work their way through the system to the point that all products containing the output of biotech seeds (most importantly; meat and farm fish products, and cotton clothing) would have a price impact. However, in the short-run, these effects are likely to be difficult to nail down and will vary greatly from product to product. In the short-run, pricing of these commodities are by and large insulated from the input costs associated with producing them (Hsieh, Mitchell, and Stiegert, Agribusiness:an international J., 2009). The pricing of commodities are heavily infulenced by the supply conditions that are determined by a variety of factors including weather. Thus, unless there is a supply response with respect to seed pricing, farmers bear most or all the short-run burden associated with market power in these markets.
Posted by: Kyle Stiegert | Feb 13, 2010 12:07:19 PM