The role of pest resistance in biotechnology R&D investment strategy

Abstract

The biotechnology industry has become highly concentrated due to two factors: large research and development (R&D) investments in biotechnology, and an intense period of mergers and acquisitions during the late 1990s and beyond. In this paper we explore the link between R&D and market concentration in the biotechnology sector. In this sector the potential development of resistance by insects to pest control biotechnology has to be accounted for. The central question is whether the pest resistance effect reinforces or weakens the link between R&D investments and concentration. To address this, we develop a standard game-theoretic model of strategic innovation between an incumbent and a potential entrant but introduce a risk of pests developing resistance. Firms are thus faced with two types of threat to their innovation—from rivals within the market ‘competitive threat’ and from pests ‘pest threat’. To combat these threats they make two types of R&D investment ‘competitive R&D’ and ‘pest R&D’. We show that the incumbent is likely to invest less (more) in competitive R&D than the entrant when innovation is drastic ( non-drastic). We find that introducing the pest effect has different impacts on relative incentives depending on whether we allow firms to react to the threat of pest resistance or not. In addition, we show that accounting for the ability of pests to develop resistance to technologies increases industry concentration.