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Monsanto, Lawsuits, and Economics

It appears that a Monsanto lawsuit (Bowman v. Monsanto) will be making its way to the Supreme Court sometime this summer (HT: Tyler Cowen).  At issue is a case brought by Monsanto against a farmer who (presumably and unwittingly) planted seed with Monsanto's protected biotechnology.  The key issue appears to hinge on whether Monsanto owns the progeny (i.e., the "kids")  of the original seed it sells, and whether farmers can replant the progeny of seed originally bought from Monsanto without paying a technology fee.    

Much has been said about the potential impacts of the lawsuit.  I don't know whether the suit has any merit.  I'm not a lawyer.  But I am an economist, and much of what has been said about the impacts if Monsanto loses are just plain wrong.    

The Business Week story on the issue quotes a professor at Washington State University’s Center for Sustaining Agriculture and Natural Resources who says.

If it’s overturned, it will have cataclysmic repercussions for the business model in the seed biotech industry,” Benbrook said by telephone. “It would basically end the agricultural biotech industry as we know it, certainly for soybeans.

Hardly.  As my colleague Bailey Norwood rightly pointed out to me after reading the story: What do you think will happen to the price of the first generation seed if farmers are able to freely replant the progeny?  

As Steven Landsburg points out in his wonderful (and recently re-released) book The Arm Chair Economist the indifference principle must always be at work.  The principle suggests that at current prices, (the marginal) farmers must be indifferent to buying Monsanto seed given that he cannot replant the progeny and must buy seed again next year.  However, if the Supreme Court rules that Monsanto does NOT own the progeny, then the value of the seed to farmers rises since they can re-use the seed.  The marginal farmer is no longer indifferent.   For the indifference principle to hold (i.e., for equilibrium to be restored), the price must rise.  Monsanto will charge more for it's initial offerings if farmers can freely replant.      

As an analogy, consider the market for textbooks.  Bailey and I wrote an undergrad textbook on Agricultural Marketing and Price Analysis a few years ago (in which we somewhat ironically discuss the indifference principle).  Buying a new copy of the book is pricey (Amazon.com has the current price of a new copy at $97.41).  What do you think would happen to the price of the initial offering of the textbook (i.e., the price of a new copy) if Bailey and I (and the publishers who actually sets the price) could receive royalties when the used textbook is resold in bookstores after the semester?  The initial price for a new book would almost certainly fall.  

The Monsanto case is simply this example working in reverse.  

Agricultural Marketing and Price Analysis
$97.41
By Bailey Norwood, Jayson Lusk