Monsanto, Microsoft, and Monopolies
April 1, 2000
by Alex A. Avery
Recently I took part in a radio debate on genetically modified food, in which another participant raised the issue of patent protection, especially the so-called “terminator” gene technology used in bioengineered crops. Biotech critic Dr. Charles Benbrooke, who runs a consultancy in Idaho, echoed many when he suggested that terminator technology was simply another tool for corporations to “monopolize” the world’s food market. The terminator concept, he argued, would render the seeds of a crop sterile, preventing farmers from illegally producing and replanting seeds from last year’s crop while preventing the outcrossing of biotech plants with their wild counterparts. According to Dr. Benbrooke, “There is clearly a lot of work going on in the major biotech/pesticide seed companies to utilize this technique to, in effect, make the farmer even more dependent upon these companies for buying what they call ‘packages of technology,’ where you’ve got to buy the seed, the pesticide, maybe some chemical that triggers a certain genetic trait. This development worries a lot of farmers. You’ve got three or four seed companies controlling the vast majority of seed varieties.”
This analysis prompted a question from me: How many companies must exist in a market to have effective competition? Benbrooke’s answer was both simple and nonsensical: “More than four.” How much more than four? Five? Eight? Fifty? He would not specify.
There are many examples of effective competition within markets dominated by a small number of companies. Two companies, Coke and Pepsi, have dominated the U.S. soft-drink market for decades. Yet consumers still have a dizzying array of soft-drink choices—both Coke and Pepsi offer four variations of cola alone: regular, diet, and caffeine-free regular and diet. These choices are offered at competitive prices because neither company can raise prices without losing customers to the other. Kodak and Fuji have dominated the U.S. film market for the past twenty years. But here, too, U.S. customers enjoy low prices and a wide array of choices.
DeBeers, the world’s largest diamond merchant, controls roughly 80 percent of the world’s diamond trade. It is the purest example one can find of a true, long-standing near-monopoly not mandated by a government. But diamonds are a unique commodity that comprises a unique market. Quite simply, consumers don’t want cheap diamonds; these gems are supposed to be expensive. They are a visible symbol, for example, of how much one person cares for another, a notion that DeBeers’ advertising reinforces earnestly.
But even in the diamond market, just one significant competitor can represent a threat to the dominant firm. Russian scientists recently mastered the art of producing perfect synthetic diamonds (up to several carats in size) in less than a day. A Florida company now sells these stones at a deep discount compared to natural stones. In response, DeBeers’ researchers spent millions of dollars trying to distinguish natural diamonds from their synthetic counterparts. DeBeers found one tiny difference (when synthetic diamonds are bathed in a special light, they glow for a second or two after the light is turned off). The firm now sells a sophisticated detection apparatus to gemologists and jewelers. The company has also begun a worldwide, multimillion-dollar advertising campaign promoting the virtues of natural diamonds.
Thus, the notion that four major companies is not enough to generate significant market competition is directly controverted by reality. And despite the many mergers and acquisitions in the agricultural-seed market during the last several years, including the purchase of Pioneer Seeds, one of the largest seed producers in the United States, by Monsanto, competition in this market is increasing, not decreasing. Companies are buying smaller competitors to facilitate competition with their larger rivals.
Exactly the same dynamic is driving consolidation in the telecommunications market. In fact, just as cellular phones and the Internet have caused massive changes in telecommunications, biotechnology is fundamentally changing the agricultural-seed industry. The pace and scope of innovation have increased tremendously, making the costs of mistakes that much greater. Before biotechnology, new seed varieties had a market life of about six years. Today, new seeds have a market life of only two to three years. In such tumultuous markets, larger companies have advantages in both research capacity and marketing.
Just as the antitrust lawsuit against Microsoft was overtaken by reality before a ruling could even be given, worries about too little competition in the seed market are likely to prove groundless.
Alex Avery is director of research and education for the Hudson Institute's Center for Global Food Issues.