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Endogenous R&D Investment and Market Structure: A Case Study of the Agricultural Biotechnology Industry

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  • Anderson, Benjamin
  • Sheldon, Ian M.

Abstract

Over the past three decades, the agricultural biotechnology sector has been characterized by rapid innovation, market consolidation, and a more exhaustive definition of property rights. The industry attributes consistently identified by the literature and important to this analysis include: (i) endogenous sunk costs in the form of expenditures on R&D; (ii) seed and agricultural chemical technologies that potentially act as complements within firms and substitutes across firms; and (iii) property rights governing plant and seed varieties that have become more clearly defined since the 1970s. This paper adds to the stylized facts of the agricultural biotechnology industry to include the ability of firms to license technology, a phenomenon observed only recently in the market as licensing was previously precluded by high transactions costs and “anti-stacking” provisions. We extend Sutton's theoretical framework of endogenous sunk costs and market structure to incorporate the ability of firms to license technology under well-defined property rights, an observed characteristic not captured in previous analyses of the sector. Our model implies that technology licensing leads to lower levels of industry concentration then what would be found under Sutton's model, but that industry concentration remains bounded away from perfect competition as market size becomes large.

Suggested Citation

  • Anderson, Benjamin & Sheldon, Ian M., 2011. "Endogenous R&D Investment and Market Structure: A Case Study of the Agricultural Biotechnology Industry," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 107832, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea11:107832
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    File URL: http://purl.umn.edu/107832
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    References listed on IDEAS

    as
    1. Arora, Ashish & Fosfuri, Andrea, 2003. "Licensing the market for technology," Journal of Economic Behavior & Organization, Elsevier, vol. 52(2), pages 277-295, October.
    2. Guanming Shi, 2009. "Bundling and Licensing of Genes in Agricultural Biotechnology," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(1), pages 264-274.
    3. Aoki, Reiko & Prusa, Thomas J., 1997. "Sequential versus simultaneous choice with endogenous quality," International Journal of Industrial Organization, Elsevier, vol. 15(1), pages 103-121, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    licensing; market structure; R&D; agricultural biotechnology; Research and Development/Tech Change/Emerging Technologies; L22; L24; Q16;

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • Q16 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - R&D; Agricultural Technology; Biofuels; Agricultural Extension Services

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