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This paper develops a model of heterogeneous producers to examine theeconomic causes of IPR infringement and its consequences for the welfare of the interestgroups and the pricing and adoption of a new technology (i.e., a genetically modifiedseed) in the context of a small open developing economy. Enforcement of IPRs, andpricing and adoption of the new technology are modeled as a sequential game betweenthe government that enforces the IPRs, a foreign innovating firm that prices the newtechnology, and the developing country’s producers who make the production andcheating decisions. Analytical results show that complete deterrence of IPR infringementis not always economically optimal. IPR infringement affects the welfare of the interestgroups and has important ramifications for the pricing and adoption of the newtechnology. The quantitative nature of the results depends critically on the existinglabeling regime. The analysis also shows that differences in the level of IPR enforcementprovide an alternative justification for (and explanation of) differences in the pricing ofthe new technology in different countries around the world – a strategy adopted byleading innovators in the sector. Finally, the results suggest that if the penalties for IPRinfringement under the TRIPs agreement follow the custom of retaliatory sanctions underthe GATT, enforcement of IPRs will remain imperfect and the innovators’ ability toobtain value for their biotech traits will still be limited.
