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Infringement of Intellectual Property Rights

Infringement of Intellectual Property Rights

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Agricultural & Applied Economics Association
Infringement of Intellectual Property Rights: Causes and ConsequencesAuthor(s): Konstantinos GiannakasSource:
American Journal of Agricultural Economics,
Vol. 84, No. 2 (May, 2002), pp. 482-494Published by: Blackwell Publishing on behalf of the Agricultural & Applied EconomicsAssociationStable URL:
Accessed: 04/09/2009 09:53
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INFRINGEMENTOFINTELLECTUAL PROPERTYRIGHTS: CAUSESANDCONSEQUENCES
KONSTANTINOSGIANNAKAS
Agame-theoreticmodel ofheterogeneousproducersisdevelopedto examine the economic causesandconsequencesof intellectualpropertyright (IPR) infringementinthe contextof a smallopendevelopingeconomy.Analyticalresults showthatcompletedeterrenceof IPRinfringementisnotalways economicallyoptimal.IPRinfringementaffects economicwelfareandhasimportantramifi-cationsfor thepricingandadoptionof the newtechnology (biotechnology).Thequantitativenatureof resultsdependsonthelabelingregime.If the TRIPsagreementfollows the customofretaliatorysanctionsunderGATT,IPR enforcementwillremainimperfectand innovators'abilityto obtainvalue for their biotechtraits will be limited.Keywords:biotechnology,enforcement,infringement,intellectualpropertyrights,TRIPsagreement.
Parallelrevolutionsin molecularbiologyandthelegalframeworkthatassignsintellec-tualpropertyrights(IPRs)toplantgeneticresourceshave resultedin theemergenceofagriculturalbiotechnologyand theintroduc-tion ofgeneticallymodified(GM)productsintothe foodsystem.IPRs create economicincentivesfor researchanddevelopmentbymakingthe innovatorthe residualclaimantofthebenefitsassociatedwith thenew technol-ogy.WhereasIPRspurporttoprotectintel-lectualproperty,fullappropriationof thebenefitsfrom the innovationisnot agiven.Wheninfringementof IPRs(i.e., piracy)isprofitable,rationaleconomicagents'com-pliancewithIPRprovisionsisbyno meansassured.Costly monitoringandenforcementarerequiredto deter unauthorized(illegal)useofthenewtechnology.Experiencefromvariouscountriesaroundthe worldindicatesthat IPR enforcementis farfrombeing per-fect andmanysuccessfulinnovationsare
KonstantinosGiannakasisassistantprofessor,DepartmentofAgriculturalEconomics,Universityof Nebraska-Lincoln.The authorthanksMurrayFulton,DickPerrin,PeterBerck,andtwoanonymousreviewersof thejournalfor their use-ful comments.Thisworkwas carriedout withpartialsupportfrom theIFPRI-ledprojectonagriculturalgeneticresourcesandbiotechnologypolicies.ThisprojectisprimarilyfundedbytheSwedishInternationalDevelopmentCooperationAgency(Sida),with additionalsupportfromthe CanadianInternationalDevel-opmentAgency(CIDA).ThisisJournalSeriesNo.13325,Agri-culturalResearchDivision,Universityof Nebraska-Lincoln.Theusualcaveatsapply.Anexpandedversionof thisworkwith acompletegraphicalanalysisis availablefromthe authoruponrequest.
subjecttopiracy (Maskus).Thisispartic-ularlytrueindevelopingcountrieswherethere is agrowing oppositiontotheverygrantingof IPRs foragriculturalcrops.Inaddition tothe domesticsurplustransferstoforeignfirms/IPRholdersintheformofmonopolisticrents,concernsofdevelop-ingcountries includeenvironmentalsafetyand foodsecurity(Taylor,Ringo).The resultis awidespreadviolationofinnovators'IPRsin these countriesthat has becomeamajorinternationalissue[onthedebateon IPRs betweenindustrializedcountries(the "North")anddevelopingcountries(the"South")seeMaskus].The concernsaboutweakIPRprotec-tion resultedin theAgreementon TradeRelatedAspectsof IntellectualProperty(TRIPs) duringtheUruguayRound of Gen-eralAgreementon Tariffs andTrade(GATT)negotiations.TheTRIPsagreementis admin-isteredbytheWorld TradeOrganization(WTO)and allowscountrieswhoseinnovat-ingfirms'IPRs arebeingviolatedto retaliateandpenalizetheviolatingcountry/enforcerofIPRs underthe GATT.EventhoughtheTRIPsagreementis tocomefullyintoforcewithin thenext fewyears,anagreementon themagnitudeof thefinesthat canbeimposedisyettobe reached.While innovatorshavebeen activein lob-byingfortheeffectiveenforcementof theirIPRs,theirpricingbehaviorreveals apref-erentialtreatmentofcustomersthatrespect
Amer.J.Agr.Econ.84(2) (May2002):482-494Copyright2002AmericanAgriculturalEconomicsAssociation
 
Infringement ofIntellectualProperty Rights483
theirIPRs the least. Inmanycases thepriceschargedbymultinational firms/IPRholdersin markets with lax enforcement ofIPRs aresignificantlylower than theprices chargedinmarkets where IPRs areeffectivelyenforced.InArgentinafor instancewhere 50 to 85%of theRoundUpReady soybeanseedsgrownare eitherseedspurchasedfrom the blackmarket(25to50%)or/and seeds savedbythe farmer from thepreviousyear's crop (25to35%),theprices chargedbytheinnovatingfirm(Monsanto)are less than half thepriceschargedto U.S.soybean producers(U.S.Gen-eralAccounting Office).Thisdiscrepancyhasraised concernsbyU.S.producerswho feelthattheyarebeing penalizedforbeing"hon-est"(Holmberg).One conclusionof this arti-cle is thattheyareprobably right.Althoughthereis agrowingliteratureontheconsequencesof IPR introductionfor investmentinresearch,thedevelopmentofimprovedvarieties,the structure of thebiotechnologysector,the international tradeofproductsofbiotechnology,and the wel-fare of interestgroups (JustandHueth,Mos-chini andLapan,Lesser, Perrin,Alston andVenner,Fulton andGiannakas),the anal-ysisof IPRinfringementbytheusers ofbiotechnologyis ratherheuristic in nature.Studies onIPRenforcementproblemshavemainlyfocused on newtechnologyimitationbyrival firms(forareview of this litera-ture seePerrin). Despitethe incentivesfor,andthe incidenceof,IPRinfringement byproducers,this issue has notbeenanalyzedsystematically.Theobjectiveof this articleis to examinethe economic causes ofIPRinfringement byproducersand itsconsequencesfor thewel-fareof theinterestgroupsand thepricingandadoptionof the newtechnology. Specifically,thisstudy analyzesthe causes and conse-quencesofunauthorized useby producersofageneticallymodified seed that isdevelopedandproduced byaforeignseedcompanyandisprotectedbyIPRs. The casewhereproduc-erscomply completelywith theprovisionsofIPRs(or, alternatively,the case whereIPRenforcement isperfect)isalsoexamined andused as a benchmark for theanalysisof theconsequencesof IPRinfringement.Althoughthe enforcement ofinnovator'srightsis an issue of relevance for most(ifnotall)areaswhere IPRs areintroduced,thisstudyconcentrateson enforcement ofIPRs in adeveloping country.Thedevelop-ing countryis a smallopen economyintheproductionofboth the traditional and GMcrops (i.e.,thepricesof thesecropsare notaffectedbydomesticproductiondecisions),and enforcement oftheseedcompany'sIPRsis theresponsibilityof the domesticgovern-ment. Theanalysistherefore focuses on caseswhere IPRsgrantedto theinnovatingfirm inits homecountryare alsovalid in the devel-opingcountrysothatIPRinfringement(i.e.,use of the newtechnologywithoutpayingaroyaltyfee to theinnovator)isillegal.Theimplications(relevance)of theanalysisforthecasewhere thedeveloping countrydoesnotrecognizeIPRsgrantedelsewhere and/orhas notyethadtocomplywith theTRIPsagreement (inwhich caseIPRinfringementisnotillegal)arediscussedinfootnotes 6 and8.IPRenforcement,pricing,andadoptionofthe newtechnology(GM seed)are modeledas asequential gamebetweenagovernmentthatisresponsiblefor the enforcementofIPRs,theinnovator whopricesthe GMseed,and theproducerswho maketheproduc-tion andcheatingdecisions.Thegovernmentmoves first anddetermines itsIPRenforce-mentpolicyknowinghow its decisionswillaffect the(optimizing)behaviorof the seedcompanyandproducers.Oncethe auditpol-icyandthepenaltiesforIPRinfringementareannounced,the innovator decideson thepriceof the GM seedthat itwillsupplyinthe domesticmarket.Finally,afterthe deci-sions of thegovernmentand theinnovatorhave beencarriedout,the farmersdecide onwhethertheywilladoptthenewtechnologyand,ifso,whethertheywillcomplywith theprovisionsof IPRs(i.e., paythe fee associ-ated with the use of the GMseed).To avoidNashequilibriainvolvingnoncredible strate-gies,theproblemis solvedusingbackwardinduction(Gibbons).Otherthanformally analyzingIPR in-fringement,a distinct feature ofthisstudyis that it relaxes the(conventional)assump-tion ofproducer homogeneity.Instead,farm-ers arepostulatedto differintherelativereturnstheyreceivefrom differentcrops,which in turn stemsfrom differencesinsuchthingsasgeography,education,managementskills,degreeofspecialization,etc. Producerheterogeneityintermsofproductionfactorsis akey componentinthe modeland is crit-icalinunderstandingthe existence ofbothtraditionaland newtechnologiesin the mar-ket,as well asthenoncompliancewith IPRprovisionsofpart(andnotall)of the newtechnologyusers.
Giannakas

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