Monopolistic pricing power for transgenic crops when technology adopters face irreversible benefits and costs

Abstract

Pricing of biotechnology innovation under a patent grant is reconsidered in a model with uncertain returns and irreversible costs and benefits. Past results on restricted monopoly pricing in the presence of competing technologies showed that pricing power is reduced. The timing of adoption of an innovation is delayed and the pricing power of the restricted monopolist is further reduced when uncertainty and irreversibility is considered. The presence of irreversible benefits results in increased willingness-to-pay for the innovation, accelerating adoption, and increasing the innovator's restricted monopolist pricing power. Using Monte-Carlo simulation, the quantitative effects were approximated by a linear function through the hyper-plane.

Notes

The relative willingness to pay includes changes in the value of the alternative technology induced by strategic responses of vendors of those technologies or their components, e.g. price changes for pesticides for non-transgenic crops. In general, recall

is defined relative to the next best technology as in Equation 7.

The motivation for choosing the risk-adjusted rate of return is that the risk of the additional benefits could be tracked with a dynamic portfolio of market assets.

, where r is the risk-free rate of return, ϕ the market price per unit of risk, σ the variance parameter, and

the coefficient of correlation between the asset or portfolio of assets that track

and the whole market portfolio.