Dynamic pricing mechanism to achieve Pareto optimality in a seed production contract

This chapter examines enforcement of the intellectual property protection (IPP) for seed and plant innovations through production contracts. The farmer-saved seed is a minor concern under seed production contracts, whereas it is a serious economic concern for contracts involving the sale of seed. A reason for this disparity is often attributed to the price premiums seed companies pay farmers under seed production contracts for their harvested seed. This chapter examines the economic rationales for this common practice by seed companies. A game-theoretic model treating the farmer-saved seed as a moral hazard in the contract proposes dynamic pricing mechanisms for the foundation seed stock, consisting of the seed company's observable variables and credible threats against the farmer-saved seed provided by either the seed company or the federal court system. Thus, the model suggests a contractual strategy for the seed company, which is an alternative to paying the farmer price premiums for the harvested seed.