In a paper published some time ago, we estimated the additional gains captured by producers, consumers, and the gene/seed innovators from the first commercially successful introduction of a GM crop in the United States: The case of insect resistant Bt cotton in the United States in 1996-1998.
This is fascinating story because in previous years before the introduction of Bt cotton in the U.S., cotton farmers in Alabama and other states endured catastrophic losses due to the budworm/bollworm complex, the target pest that is controlled by the Bt technology. Damages in the previous year to the Bt cotton introduction where in some cases in the order of 400-500 US$ per acre. Some of the technical experts at the time indicated that if Bt cotton was not introduced in the U.S. it would not be profitable to plant cotton at all in Alabama and other states. Not surprisingly, the first of year of adoption, Bt cotton was adopted in 74 % of the area planted with cotton in Alabama, although area varied widely depending on whether the target pest was a problem in a specific location.
The gene/seed innovator charged the equivalent of US$ 32 per acre as a technology fee on top of the conventional seed price. A cotton producer when comparing the potential damages of 400-500 dollars per acre to a technology fee of 32 dollars, did not seem like such a bad deal. Yet, my expectation –as an economist trained in traditional orthodox production economics- was that since there was one sole supplier of an innovation that enjoyed intellectual property protection, then we would expect to see that the innovator would capture most or even all rents from producer and consumers. This expectation was in fact the maintained hypothesis in my Ph.D. dissertation!!!
Lo and behold, when I estimated the numbers for gains in consumer, producer and innovator surplus in the United States for the first three years of adoption of Bt cotton in the US, reality was quite different than my “theoretical” expectations. Farmers captured more or less half of the additional benefits from adopting the technology (see figure). This result has been also shown in other studies in the literature under similar conditions. In fact I repeated this same analysis for the U.S. in collaboration with colleagues from USDA-ERS (see Lin et al 2004) using an updated data set estimates from 1998 and although the numbers vary from my original estimates, they are qualitatively the same.
Obviously, our simplification of a monopoly innovation explaining Bt cotton in the US was more complicated than the neo-classical textbook discussion. In one of my next posts, I will explain a bit more about our rationale in explaining why the innovator did not capture all rents, in fact it could have charged more for a technology fee…yet they didn’t….
Lin, W, G. Price, J. Falck-Zepeda, J. Fernandez-Cornejo. “Economic Impacts of Adopting GM Crops in the United States.” 2004. Farm Policy Journal, Volume 1, Number 2, pp. 50 – 64 (15 pages).
Falck-Zepeda, J. B., G. Traxler and R.G. Nelson. “Surplus Distribution from the Introduction of a Biotechnology Innovation American Journal of Agricultural Economics. 82 (May 2000):360-369.