Incentives to reduce crop trait durability.

Lastly, it is worth mentioning that there are similarities between the multiseed strategy derived above and the second-period price discrimination analyzed previously. In both cases, the monopolist uses these strategies in order to discriminate between farmers with low self-production costs and those with high self-production costs. The first type of farmer is willing to buy inbred line seed in the first period at a higher price, but the second type is not. As observed before, with no discriminatory device, the monopolist has to set a reasonable inbred line price in order to benefit from both types of farmers. The monopolist can partially solve this dilemma with the two strategies studied above. With second-period price discrimination, the farmer with high self-production costs is willing to buy inbred line seed at a high price because he then also buys a discount on the second-period price. With a multiseed strategy, each type of seed is used in the first period to extract some surplus from each type of farmer: the inbred line seed is sold to the first type of farmer, whereas hybrid seed is sold to the second type. As a final point, note that second-period price discrimination always increases surplus, but the multiseed strategy can lead to a decrease in surplus.

Conclusion

By introducing nondurable crops, seed producers can reduce the competition they face from farmers who self-produce. We analyze the incentives for a monopolist to supply less durable seed, the welfare implications of the introduction of nondurable goods, and how inefficiency can be restored through the introduction of self-production fees. In our setting, self-production is inefficient because the seed producer has lower production costs than farmers.

We analyze pricing decisions and switching decisions in different settings. We consider a monopoly model in which an inbred line seed producer can decide to switch to hybrid seed. We show that hybrid seed can be preferred to inbred line seed, even if it is less efficient, in order to extract more surplus from farmers. The introduction of a self-production fee allows efficiency to improve. We then consider several extensions of our basic framework. First, we investigate what happens when the monopolist cannot commit on future prices. Second, we consider the case where the monopolist can price discriminate in the second period between farmers who did or did not buy seed in the first period. And lastly, we study the incentives for a monopolist to become a multiseed producer.

Within a simple framework, we attempt to provide an explanation of why producers may have incentives to reduce crop trait durability, even though it is not efficient to do so. We show that the monopolist may introduce a nondurable good for strategic purposes.

We thank Philippe Mareoul, Stephan Marette, GianCarlo Moschini and two referees for useful comments. We also benefited from feedback during seminar presentations in Grenoble, NFL seminar at Iowa State University and at the AAEA 2005 meeting. All remaining errors are ours.

[Received March 14, 2006; accepted August 2, 2007.]

References

Alston, J.M., and R.J. Venner. 2002. "The Effects of the US Plant Variety Protection Act on Wheat Genetic Improvement." Research Policy 31 (4): 527-42.

Ambec, S., C. Langinier, and S. Lemarie. 2007. "AJAE Appendix: Incentives to Reduce Crop Trait Durability." Unpublished manuscript. Available at: http://agecon.lib.umn.edu/.

Bulow, J.I. 1982. "Durable-Goods Monopolists." Journal of Political Economy 90(2):314-32.

--. 1986. "An Economic Theory of Planned Obsolescence." Quarterly Journal of Economics 101(4):729-49.

Burton, D.M., H.A. Love, G. Ozertan, and C.R. Taylor. 2005. "Property Rights Protection of Biotechnology Innovations." Journal of Economics and Management Strategy 14(4):779812.

Coase, R. 1972. "Durability and Monopoly." Journal of Law and Economics 15(1):143-49.

Gallais, A. 1990. Theorie de la selection en amelioration des plantes. Paris: Masson.

Goeschl, T., and T. Swanson. 2003. "The Development Impact of Genetic use Restriction Technologies: A Forecast Based on the Hybrid Crop Experience." Environment and Development Economics 8(1):149-65.

Gul, F., H. Sonnenschein, and R. Wilson. 1986. "Foundations of Dynamic Monopoly and the Coase Conjecture." Journal of Economic Theory 39(1):155-90.

Hendel, I.E., and A. Lizzeri. 1999. "Interfering with Secondary Markets." Rand Journal of Economics 30(1):1-21.

Kesan, J., and A. Gallo. 2005. "Insecure Property Rights and Plant Varieties: The Effect on the Market for Seeds in Argentina." In American Agricultural Economics Association Annual Meeting.

Lence, S.H., D.J. Hayes, A. McCunn, S. Smith, and W.S. Niebur. 2005. "Welfare Impacts of Intellectual Property Protection in the Seed Industry." American Journal of Agricultural Economics 87(4):951-68.

Liebowitz, S.J. 1985. "Copying and Indirect Appropriability: Photocopying of Journals." Journal of Political Economy 93(5):945-57.

Matuschke, I., and M. Qaim. 2006. "Adoption and Impact of Hybrid Wheat in India." Paper presented at the International Association of Agricultural Economists Conference, Gold Coast, Australia, August 12-18, 2006.

Morita, H., and M. Waldman. 2004. "Durable Goods, Monopoly Maintenance, and Time Inconsistency." Journal of Economics and Management Strategy 13(2):273-302.

Perrin, R.K., and L.E. Fulginiti. 2004. "Dynamic Pricing of Genetically Modified Crop Traits." In R.E. Evenson and V. Santaniello, eds. The Regulation of Agricultural Biotechnology, CABI, pp. 183-90.

Schmalensee, R. 1974. "Market Structure, Durability, and Maintenance Effort." Review of Economics Studies 41: 277-87.

Swan, P.L. 1970. "Durability of Consumption Goods." American Economics Review 60:884-94.

--. 1971. "The Durability of Goods and Regulation of Monopoly." Bell Journal of Economics 2:347-57.

Takeyama, L.N. 1997. "The Intertemporal Consequences of Unauthorized Reproduction of Intellectual Property." Journal of Law and Economic XL:511-22.

Van Tongeren, E, and D. Eaton. 2004. "The Case for Differentiated Appropriability in Intellectual Property Rights for Plant Varieties." In R.E. Evenson and V. Santaniello, eds. The Governance of Agricultural Biotechnology. Wallingford, UK: CABI.

Waldman, M. 1996a. "Durable Goods Pricing When Quality Matters." The Journal of Business 69: 489-510.

--. 1996b. "Planned Obsolescence and the R&D Decision." Rand Journal of Economics 27(3):583-95.

--. 1997. "Eliminating the Market for Secondhand Goods: An Alternative Explanation for Leasing." Journal of Law and Economics XL: 61-92.

--. 2003. "Durable Goods Theory for Real World Markets." Journal of Economic Perspectives 17(1):131-54.

(1) In genetic terms, inbred line seeds are homozygous. Consequently, if an inbred line is self-pollinated, its offspring is genetically homogeneous and identical to the parent inbred line. Hybrid seeds are heterozygous and result (usually) from the cross of two different inbred lines (Gallais 1990). Hybrid seed performance is greater than that of either of the two inbred parental lines. When a hybrid is self-pollinated, its offspring is heterogeneous, with an average performance closer to that of one of the inbred parental lines, and less than the original hybrid performance.

(2) L'accord CVO Recherche est inscrit dans la loi, Semences et Progrrs 2005.

(3) In India, the hybrid wheat introduced by Maharashtra Hybrid Seed spread to 25,000 ha in 2005 (Matuschke and Qaim 2006).

(4) Syngenta has introduced hybrid barley in England and France. See http://www.newfarmcrops.co.uk/Winter%20barley/ Home.aspx for England and http://www.orgeshybrides-boost.com for France.

(5) Usually, hybridization based on genetic mechanisms leads to lower production costs. In the case of wheat, hybridization is based on the use of a chemical compound that kills the pollen of the parent female line. In barley, the male sterility of the female parent line is based on a genetic mechanism.

(6) In practice, a fee of 0.5 Euro per ton is collected systematically on harvest and reimbursed to the farmer if he buys the seed or cultivates small areas.

(7) From 2001 to 2006, this fee has generated an average additional profit of 6 million Euros for the wheat breeders, an increase of 20% in their profit from the sale of seeds (Semence et Progres 2006).

(8) van Tongeren and Eaton (2004) and Kesan and Gallo (2005) also address this issue in the context of developing countries.

(9) Kesan and Gallo (2005) analyze the impact of such a fee on the incentive to invest in research, but not on the choice of type of seed.

(10) Formally, the model would lead to the same result if we assumed that production costs are equal to zero for the producer and the farmers, but the profit would be [[PI].sub.L] - [theta] after self-production and [[PI].sub.L]. after buying the seed.

(11) The second-period price is set high enough (e.g., [P.sub.2L] > [theta]) to induce farmers to self-produce seeds.

(12) This assumption simplifies the analysis without qualitatively altering the results. It basically holds if the farmers' comparative disadvantage in self-producing, as well as the heterogeneity in self-production costs, are not "too high." Note that since all farmers self-produce, any price [P.sub.2L] [greater than or equal to] [[PI].sub.L] would implement the comer solution of the durable good strategy.