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R&D Concentration Under Endogenous Fixed Costs: Evidence from Genetically Modified Corn Seed

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  • Benjamin C. Anderson
  • Ian M. Sheldon

Abstract

We examine the role of fixed costs in research and development (R&D) in the market for genetically modified (GM) corn seed. In a mixed model of horizontal differentiation by genetic traits and vertical differentiation by productivity, we derive the empirically testable lower bounds to R&D concentration when R&D investments and market entry are jointly determined. When R&D investments translate into higher product quality, industries are said to be characterized by endogenous fixed costs such that the lower bound to R&D concentration increases with market size, but is less than the lower bound to market concentration based on sales. Using data on field trial applications of GM corn seed, we estimate the lower bound to R&D concentration, and find evidence of endogenous fixed costs with R&D concentration that is significantly greater than perfectly competitive levels. These endogenous fixed costs imply that concentration in the agricultural biotechnology industry is occurring due to the nature of R&D investment in product quality and not through anticompetitive practices. Adjusting for past merger and acquisition activity significantly raises the lower bound for infinitely-sized markets, but has no impact upon current market sizes, implying the industry may still undergo additional consolidation.

Suggested Citation

  • Benjamin C. Anderson & Ian M. Sheldon, 2017. "R&D Concentration Under Endogenous Fixed Costs: Evidence from Genetically Modified Corn Seed," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(5), pages 1265-1286.
    • Handle: RePEc:oup:ajagec:v:99:y:2017:i:5:p:1265-1286.
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    File URL: http://hdl.handle.net/10.1093/ajae/aax036
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    Cited by:

    1. Benjamin C. Anderson & Ian M. Sheldon, 2024. "R&D Concentration in Soybean and Cotton Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(1), pages 93-115, February.
    2. Feeney, Roberto Juan & Harmath, Pedro & Clay, Pablo Mac, 2020. "Brand Loyalty in Argentine Commercial Crop Seed Markets," International Journal of Agricultural Management, Institute of Agricultural Management, vol. 9, April.

    More about this item

    Keywords

    Endogenous fixed costs; genetically modified corn seed; market structure; R&D;
    All these keywords.

    JEL classification:

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

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