Conduct and Pricing in the U.S. Seed Industry
Seed prices may also depend on the increasing level of industrial concentration. Biotechnology
firms can benefit from complementarities and economies of scope that enhance the efficiency of
R&D activities related to genetic improvements across traits and/or crops. On the other hand,
high concentration raises concerns about the exercise of market power, which could have adverse
effects on the efficiency of R&D activities, the rate of technological progress in agriculture, and
the rate of adoption of biotechnology.
To confront the issue of market concentration, we develop and employ a multi-product
variant of the traditional Herfindahl-Hirschman index (HHI) as a measure of market
concentration. These indices are called generalized HHI or GHHI. The GHHI recognizes
traditional own-market concentration and extends the analysis to consider cross-market
concentrations involving markets for different seed types. The cross-market GHHI is shown to
have a positive relationship with price when the products are substitutes, but a negative
relationship with price when products are complements. For example, complementarities can
arise if a more integrated system of production of GM seeds by a few large firms contributes to
reducing the cost of development. If these complementarities are large, they can reduce or
reverse the price-enhancing effect of market power. An econometric analysis of seed prices can
provide useful information on how market concentration can affect seed prices. For corn, Shi,
Chavas and Stiegert (2010a) and Stiegert, Shi, and Chavas (2010) found evidence of departures
from marginal cost pricing, reflecting that market power does influence seed prices paid by
farmers. For cotton, Shi, Stiegert and Chavas (2010) found that increases in own-market
concentration do contribute to higher seed prices. But they also documented that, through
complementarities, cross-concentration tends to be associated with lower seed prices. This shows
that increased market concentrations do not always increase prices. It also stresses the need to
analyze the implications of imperfect competition in a multi-market context.
Vertical Ownership and Pricing
Does vertical organization affect pricing in the U.S. seed sector? Shi and Chavas (2010) and Shi,
Stiegert and Chavas (2010) study this issue for soybean and cotton, respectively. The analysis
distinguishes between two types of vertical organizations: licensing and vertical integration.
The evolving vertical structure in the U.S. cottonseed industry is of special interest.
While the licensing of biotechnology seeds remains dominant, biotechnology firms have
increased their use of vertical control through integration. The market for integrated cottonseed
has grown beginning in 2005 when Monsanto repurchased a previous spinoff (Stoneville) and
expanded on its vertical integration afterwards. Bayer CropScience, a large agricultural
biotechnology company, entered the cottonseed market in 1999 through the acquisition of
FiberMax varieties from Aventis Crop Science, and has exhibited a major growth in sales since
2002 (Shi, 2009). And similar trends exist in the soybean seed markets. In single-trait soybean
seed markets, vertical integration has increased from 13% of the market in 2000 to 26% in 2007.
This documents a general trend toward vertical integration in the U.S. seed sector. Are
these changes motivated by efficiency gains that might reduce the prices paid by farmers? Or are
they reflecting attempts to increase market power that raises the price? Shi and Chavas (2010)
and Shi, Stiegert and Chavas (2010) found evidence that seed prices do vary with the vertical
organization of the sector. For both soybean and cotton, they document that seed prices under
vertical integration tend to be higher than under licensing. This indicates that vertical integration
by biotechnology firms may increase the exercise of market power and the firms’ ability to
extract economic benefits from seed dealers and farmers. Such finding is consistent with
biotechnology companies’ reluctance to allow licensees to stack the licensed trait with other
companies’ trait, as exemplified by the antitrust settlement in the above mentioned Monsanto-
DPL case. Biotech firms can recover the R&D expenditure more effectively through direct sale
under vertical integration than through licensing fee revenue. Indeed, cheaper alternatives from
the licensees may impose some competitive pressure to the integrated firms’ product.
Final Thoughts
Biotechnology advances have been catalysts for innovations in agriculture, and they have been
associated with a growth of private R&D investments, the patenting of GM traits, and increased
concentration in seed markets. The rapid adoption of GM seeds in the United States gives an
indication that biotechnology has contributed to strong agricultural productivity gains. So far,
seed prices have been low enough to maintain farm profitability and induce farmers to adopt GM
seeds.
Mergers have led to increased concentration in seed markets, and they are part of trend
toward greater vertical integration in the biotechnology seed sector. The rapid emergence of only
a few firms that hold most patents on GM traits is a public policy concern. These changes raise
questions about the organizational efficiency of the U.S. and global seed industries, which is
important as seeds are crucial factors affecting the ability of agriculture to feed a growing world
population. Will concentrated markets lead to higher seed prices, fewer choices for farmers and
closure of independent seed companies? What market structure would maintain the incentive for
private investments in seed development? While history has shown that the privatization of the
seed industry can be consistent with rapid technological progress in agriculture, maintaining a
balance between providing incentives for agricultural innovations and sustaining farm
profitability remains a challenge. Our most consistent finding through all studies is a
preponderance of sub-additive pricing in stacked seeds. We have also found that increased
concentration in the seed industry has contributed to higher seed prices. However, through
multimarket complementarity effects, increased concentration can also be associated with
efficiency gains and lower seed prices. Future research should be directed toward a better
understanding of these topics to provide policymakers with information on how to protect and
expand innovations while maintaining agood distribution of associated benefits between
innovators, farmers and consumers.