Innovation and IPRs for Agricultural Crop Varieties as Intermediate Goods

The tradeoffs involved in the extent of appropriability conferred by intellectual property right (IPR) protection to innovators remains an area with many unanswered questions. This paper considers the case of IPRs for product innovations where the product is an intermediate good used to produce a final consumer good. Producers of the final good purchase an innovation from a monopolist, represented in a vertical product differentiation framework. The innovation is subject to an IPR for which the extent of appropriability is determined by a policy maker. The analysis reveals some novel aspects of the traditional innovation versus diffusion tradeoff. More productive producers of the final good benefit from stricter appropriability and the resulting higher level of innovation. Less productive producers, and also consumers, are better off with a moderate level of appropriability. The paper is motivated by the agricultural sector in which an innovator uses genetic resources to produce new crop varieties to be marketed to a farm sector that displays heterogeneity in its ability to profit from the innovation. The scope of the exclusive rights granted over plant varieties has increased in various countries over the past four decades, partly as a result of the TRIPS Agreement, and has been the subject of much policy debate at international, as well as national, levels, partly given potential implications for food security. For these reasons, the model is extended to a two country setting consisting of North and South, which highlights both the interest of the South in maintaining lower levels of appropriability, but also the pressure from farmers in the North for the South to raise its standards. This would not necessarily benefit global consumers.