Product differentiation arising from genetically modified organisms: trade and welfare effects in the soybean complex

Andrei A. Sobolevsky

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The first biotechnology innovations in agriculture, such as herbicide resistant crops, took the form of cost reducing process innovations and were modeled as such. In recent years it became clear that these innovations are also product innovations in that they introduce altered, genetically modified final products to the market, and consumer preferences against the presence of GMOs in food drive the differentiation between products obtained using the conventional and biotechnology. I develop a new partial equilibrium four-region world trade model for the soybean complex comprising soybeans, soybean oil and soybean meal, in which some consumers view genetically modified Roundup Ready (RR) soybeans and products as weakly inferior to conventional ones, the RR seed is patented and sold worldwide by a U.S. firm, and producers employ a costly segregation technology to separate conventional and biotech products in the supply chain. The calibrated model is solved for equilibrium prices, quantities, production patterns, trade flows and welfare changes under different assumptions regarding regional governments' production and trade policies, differentiated consumer tastes, and several other demand and supply parameters. Incomplete adoption of RR technology naturally arises in the free trade equilibrium, with the United States producing both soybean varieties. The United States, Argentina, Brazil and the Rest of the World all gain from the introduction of biotechnology. Price support programs for U.S. farmers, despite hurting the United States, have the potential to further improve world's efficiency. Compared to the free trade with no domestic bans, a ban on RR production in the Rest of the World improves that region's welfare at some levels of segregation costs but hurts the Unites States. Introduction of the same ban in Brazil benefits its farmers but makes the region worse off, and an import ban on RR products significantly reduces welfare of all agents. The distribution of welfare between consumers and producers appears to be sensitive to several parameters of the model, but region-level outcomes are robust with respect to most of them and are sensitive only to parameters defining the share of GMO-conscious consumers and elasticity of demands for conventional product varieties.

Date: 2002-01-01
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