A Worrisome Crop? Is There Market Power in the U.S. Seed Industry?

By Kalaitzandonakes, Nicholas; Magnier, Alexandre et al. | Regulation, Winter 2010 | Go to article overview

A Worrisome Crop? Is There Market Power in the U.S. Seed Industry?


Kalaitzandonakes, Nicholas, Magnier, Alexandre, Miller, Douglas, Regulation


The Obama administration has promised to strengthen antitrust enforcement and to reverse the more laissez-faire guidelines of the previous administration.

In this context, the U.S. Department of Justice has recently focused its attention on certain agricultural industries, including the U.S. seed industry. The primary areas of concern are the growing level of market concentration and the potential use of market power by seed firms.

Markets are said to be concentrated if a few firms hold a relatively large share of the market, and high concentration is one of the criteria used by federal antitrust authorities when they evaluate the competitive conditions of a particular market. Firms in a highly concentrated market may be able to exert market power and raise prices above a competitive level, to the detriment of buyers. However, high concentration does not necessarily imply the exertion of market power. Economic theory predicts that prices may be kept at or near competitive levels under the threat of entry by new suppliers, even in industries that are highly concentrated. Also, the market may be contestable and remain relatively competitive if potential entrants do not face costs that existing firms can avoid, there are no inherent legal barriers to entry, and entry and exit are relatively costless (i.e., there are no sunk costs). Several economists have noted that firm entry in the U.S. seed industry may be limited by large entry costs due to high research and development investments and regulatory compliance costs as well as by the complexity of intellectual property rights. These circumstances could limit market contestability and increase the likelihood that firms exert their market power.

At the same time, other authors have noted that the presence of some market power in the U.S. seed industry may not be completely undesirable. Seed firms engaged in the development of new genetics and biotech traits are expected to charge prices above marginal costs in order to recoup the fixed costs of R&D. Without the existence or the prospect of earning prices above marginal costs due to market power, the seed firms would have no incentive to use more efficient technologies, improve product quality, or introduce new seed varieties and biotech traits. Therefore, some authors have proposed that the key question to be addressed is whether concentration and potential presence of market power in the seed industry permits firms to make profits well above those necessary to recoup their R&D investments.

In this study, we report empirical measures of price mark-ups attributable to market power in the U.S. seed industry between 1997 and 2008 - a period characterized by the vertical integration of leading multinational biotechnology firms in this industry. We then calculate the revenues from the estimated mark-ups, compare them with approximate measures of aggregate R&D expenditures in the industry, and draw conclusions about their proportionality over the period of analysis. These results provide insight on the dynamic efficiency of the industry.

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Structural Evolution

Understanding the structural evolution of the U.S. seed industry can help put in context the current considerations of concentration and market power. Since the emergence of a commercial seed industry in the United States over 150 years ago, assets have changed hands frequently and most of today's leading seed companies are the products of mergers and acquisitions. Until the late 1960s, assets in the seed industry were primarily traded among seed companies. Starting in the 1970s, however, petrochemical and pharmaceutical multinational companies became primary acquirers. Much of this activity has been traced to the introduction of the Plant Variety Protection Act of 1970, which promised to increase returns from plant research and attracted R&D-minded multinationals. However, this wave of mergers and acquisitions had little subsequent discernible impact on the structure of the seed industry because the petrochemical and pharmaceutical multinationals mainly acquired and merged small and medium-size regional seed companies, which lost market share over time.

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A Worrisome Crop? Is There Market Power in the U.S. Seed Industry?
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