Intellectual property protections aim to preserve an innovator’s incentives by attempting to prevent buyers from copying the products. When copying is limited to dishonest or ill-informed industrial practices, standard tools of protection such as patents are an effective way to enforce intellectual property rights. Things are different when technology allows legal buyers to become illegal users by making cheap and almost perfect copies, which is the case in the software industry and in the seed industry, to name just two. Pure legal enforcement devices can be too expensive—and often totally ineffective—in preventing piracy.

This paper analyzes the relative advantages of several different intellectual property protection mechanisms for the seller and the users of genetically modified (GM) seed. The seed industry uses three types of contractual arrangements to protect proprietary seed. Under Technology Use Agreements, users pay a technology use fee ; these agreements prohibit use or sale of progeny seed for planting. Technology Protection Systems come into play when the seller can control the efficiency of seed self-replication; this mechanism physically limits the "durability" of the product, so that the user cannot become a competitor of the GM seed seller. Long Term Contracts are the third protection analyzed in the paper. They allow farmers who buy GM seed to plant progeny seed in the future. Similar long term contracts have been used for licensing software.

The authors’ analysis is based on a two-period model where one biotech-firm is the only seller of a certain kind of GM seed. It faces farmers who can use either traditional seed or GM seed. Given one of the three aforementioned systems of intellectual property protection, the seller fixes a first-period price. The farmers can choose to buy GM seed at this price, or to plant traditional seed. In the second period, the seller fixes a new price. The traditional farmers from the first period continue to face the same set of options, while the GM users from the first period now have the additional option to break the law and copy the GM seed they planted before. The model is solved by determining the prices that maximize the discounted profits the seller stands to reap given the farmers’ expected opportunistic behavior. A fraction of the expected profit here is the penalty paid by those farmers who are caught breaking the law during period two.

It appears that the seller’s expected profit is higher under technology protection systems than under long term contracts; long term contracts, in turn, are more profitable than technology use agreements. Clearly, technology protection systems are good for the seller, since they preclude any opportunistic behavior by buyers. For farmers, the ranking is reversed. Farmers like technology use agreements because these allow them to challenge the seller’s market power, albeit illegally. This conflict of interest is not surprising, since the model does not consider any effects (such as network externalities) that could benefit users under a monopoly regime. Considering social welfare, the authors show that technology protection systems cannot be the best solution to the protection problem because they allow sellers to maintain a pure monopoly during each period. The authors argue that long term contracts are the most welfare enhancing intellectual property protection for the GM seed industry.

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