Chapter 18 REGULATION, TRADE, AND MARKET POWER: AGRICULTURAL CHEMICAL MARKETS AND INCENTIVES FOR BIOTECHNOLOGY Vincent H. Smith Montana State University Abstract: Chemical companies generally support environmental regulatory segregation of Canadian and U.S. agricultural chemical markets, apparently because it enables them to practice third-order price discrimination. This study provides new cross-section evidence that suggests that price discrimination is practiced. We consider the potential implications of chemical market segregation for the innovation and adoption of biotechnologies that are linked to chemical use and chemical prices in the context of a two-sector-two-country model solved as a two-stage game. Biotechnology implications of regulatory harmonization that reintegrates the two chemical markets are then examined. Key words: price discrimination, agricultural chemicals, biotechnology 1. INTRODUCTION Incentives for agricultural biotechnology innovation and adoption are in part linked to the markets for other agricultural inputs. In some cases, the struc- tures of the markets for agricultural chemicals may play critical roles in de- termining whether agricultural biotechnology R&D firms are willing to in- vest in a specific line of research. These market structures influence the de- rived demands for agricultural chemicals of agricultural producers and, as a result, the expected profitability of potential agricultural biotechnology in- novations. Roundup is a clear-cut example. The derived demands of agri- cultural producers for Roundup-Ready corn, wheat, and soybeans are trans- parently related to the price of Roundup because the cost savings obtained from their use are inversely related to the chemical's price. Monsanto's in- centives to develop Roundup-Ready varieties of these crops were therefore