Biotechnology Interest Group

Michigan State University

Biotechnology Economics and Policy: Progress on Four Important Issues.

Industry Structure and the Tradeoff Between Static and Dynamic Efficiency. We know that the exercise of market power leads to static inefficiencies, but in a Schumpeterian sense it is exactly this market power that draws firms to invest in biotechnology and other R&D and thus contribute to economic growth. This tradeoff raises several questions: How much market power is too much? Is the threat of entry by firms sufficient to deter anti-competitive behavior? What are the implications for a socially optimal structure in the innovation (R&D) industry?

Work in this area includes three papers describing the level and direction of plant biotechnology research (Oehmke 2001, R&D Races and Industry Structure, AgBioForum4(2001)2, http://www.agbiorfoum.org; Oehmke and Wolf, 2001a, Is Concentration Affecting Agricultural Biotechnology R&D Performance?; Oehmke and Wolf, 2001b Concentration in the Biotechnology R&D Industry: A Tale of Two Measures). We examine the dynamic pattern of firm numbers in Oehmke et al. 2000 (Is agricultural research still a public good? Agribusiness, 16(1):68-81) and 2001 (Cyclical Concentration in the Agricultural Biotechnology Industry), finding empirical evidence that at least for some crops (e.g. soybeans) this pattern is cyclic, and provide a theoretical model that characterizes and explains these cycles.

The Role of the Public Sector in Biotechnology Research. Biotechnology, coupled with changes in intellectual property laws, calls into question the non-excludeability and hence public-good nature of agricultural research. As universities increasingly protect academic property, these organizations may act increasingly as private-sector firms act. These changes raise the question: Is Agricultural Research Still A Public Good?

In Oehmke et al. (2000) we conclude that biotechnology and increased private-sector appropriability has changed the delimitations of research with public-good characteristics, away from applied work and away from production research in the major commodities toward basic research and niche markets. In Oehmke (2001) I find that in plant biotechnology, the public sector is not competing with the big corporations but filling this adjusted role in niche market commodities. In Maredia et al. (1999, Public agricultural research and the protection of intellectual property: issues and options. AgBioForum2(3&4)) we examine why some protection of university intellectual property is consistent with the Land-Grant mission. In Oehmke et al. (2001) we further model the emerging role of the universities as providers of intellectual property that is commercialized by small and medium university-related firms, such as startup firms in technology parks.

Parallel work examines the potential public-sector role in highly concentrated markets. The issue here is that firms in highly concentrated markets may exercise market power and restrict access to high-technology inputs in order to generate large technology fees and profits. If this is the case, is there a role for the public sector in increasing access to the latest technology? Does this require the public sector to conduct research to discover (or at least legally imitate) the latest technical innovations?

We examine this question in mixed oligopoly models. Preliminary results show that there is a role for the public sector in the provision of research products in highly concentrated markets, and in genomic research (Naseem and Oehmke (2000), Paper presented at the AAEA Annual Meetings, Tampa FL. Naseem and Oehmke (2001), "The Role of the Public Sector in Genomic Research". Paper presented at the NC 208 meetings, Berkeley CA, March 30-31).

A reflective piece emphasizing the conjunction of biotechnological advances, changes in intellectual property rights, addresses issues such as the public sector's increasing reliance on private-sector resources, and increasing concentration throughout the industry (Weatherspoon, Oehmke and Raper, 2001. Under Stress: The Land Grant Research Agenda and Biotechnology)

The Influence of Biotechnology on Trade and Development. Biotechnology and European Union policy regarding transgenic foodstuffs are the most powerful forces influencing agricultural trade patterns. We explore the implications of these issues for trade and growth (Oehmke, Maredia and Weatherspoon, 2001, The Effects of Biotechnology Policy on Trade and Growth, J. Int. Law and Trade Policy, Vol 2(2001), No. 2 http://www.esteyjournal.com; Francis, Weatherspoon and Oehmke, 200, European Agricultural Biotechnology Preferences and Policy: Growth and Trade Implications) In Francis et al.(in preparation) we examine the effect of biotechnology on trade patterns using economic geography modeling.

Implications for Managing Research and Development. Agricultural and life-sciences research are being conducted and/or funded by both the private and public sectors. Our work in the private sector has addressed the issues of how and how early do you bring economic and market analysis into the decision about which lines of scientific inquiry to pursue (Wolf, Weatherspoon and Oehmke, presented at the 2000 IAMA conference), and how information about the value of innovations in food-related products flows from the consumer to the producer-finding that in the pork sector 'flow' is an optimistic term and the route is circuitous (Hightower, M.Sc. paper, 2001).

For the public sector, the primary issues are whether and what types of research to fund. In addition to the public-sector implications discussed above, preliminary results indicate that there is an important role for the public sector to play in funding and preserving access to the results of basic research, particularly when industry structure is such that a few firms dominate. This has important implications for research such as development of the 'gene gun' (which the public sector developed but sold to a private-sector firm) and for current activities such as the human and other genome projects, most of which are funded at least in part by the public sector, which is also making results accessible at zero or nominal cost (Naseem and Oehmke, 2002a, in preparation). In fact, the 'spillovers' of knowledge from publicly funded and readily accessible research provides, in many market structures, an increase in social welfare that would not be obtained if the research and development activities were left solely to the private sector.