Innovation, Licensing, and Competition: Evidence From Genetically Engineered Crops

ABSTRACT We provide a novel empirical analysis of the role of technology licensing, between competitors, for genetically engineered (GE) traits in the US seed industry. We extend the standard differentiated‐product Bertrand pricing model to include trait licensing, which permits us to recover marginal costs and (otherwise unobserved) royalty rates. Estimation relies on a large dataset of farm‐level seed purchases. We find that markups over marginal cost are sizeable, and royalties for GE traits contribute a non‐trivial amount to these markups. Licensing GE traits to competitors benefits all seed sellers and, notwithstanding its strategic effect on pricing, also increases total market surplus.