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

Benjamin Anderson () and Ian M. Sheldon

American Journal of Agricultural Economics, 2017, vol. 99, issue 5, 1265-1286

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.

Keywords: Endogenous fixed costs; genetically modified corn seed; market structure; R&D (search for similar items in EconPapers)
JEL-codes: L22 Q16 (search for similar items in EconPapers)
Date: 2017
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American Journal of Agricultural Economics is currently edited by Madhu Khanna, Brian E. Roe, James Vercammen and JunJie Wu

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Handle: RePEc:oup:ajagec:v:99:y:2017:i:5:p:1265-1286.