The first generation of agricultural crops developed using biotechnology have offered the primary producers of the crops agronomic benefits. Some consumers have resisted accepting this technology because of concerns with food and environmental safety, and ethical issues that arise from the processes that are involved in developing these products. The second and third generation of agricultural biotechnology are being developed to offer products with direct benefits to consumers. The focus of this thesis is the second generation, which have added health benefits. Specifically, the obstacles to commercialization of functional foods derived through biotechnology are examined. The three factors which have the potential to set back commercial introduction of functional foods derived through biotechnology are government regulatory uncertainty, consumer aversion and brand risk, and gaining access to intellectual property. The regulations governing functional foods are examined to show the regulatory ambiguity that exists in Canada. Comparisons are drawn to other nations. Literature that focuses on consumer aversion to agricultural biotechnology is reviewed, along with consumer preference studies with regards to genetically modified (GM) foods with and without health benefits. Transaction cost economics literature is used to analyse the problems related to gaining access to intellectual property and the resulting supply chain implications. Three separate theoretical models are developed to examine each of the three factors separately. Government regulatory uncertainty is incorporated into an expected profit model to show the effects of increased uncertainty on the expected profit from a new technology. A heterogeneous consumer preference model is used to show the effects of changing consumer preferences on the market share of the firm introducing the GM functional food to the market. Simulation analysis using this model shows the effects of changing variables on the market shares of three products in the market. Finally a stylized model of the vertical market shows the effects of increased transaction costs incurred in gaining access to intellectual property on the rent that is available for distribution throughout the supply chain. The results show that these factors could be an obstacle to commercial development of functional foods derived through biotechnology. When the three factors are combined, the rent available for distribution is important for the success of the supply chain. Multiple bilateral monopoly negotiations cause this rent to be less than optimal. Increased levels of government regulatory uncertainty, consumer aversion and brand risk, and costs gaining of access to intellectual property decrease the expected rent available for distribution. This could be a problem facing developers of functional foods derived through biotechnology.

The first generation of agricultural crops developed using biotechnology have offered the primary producers of the crops agronomic benefits. Some consumers have resisted accepting this technology because of concerns with food and environmental safety, and ethical issues that arise from the processes that are involved in developing these products. The second and third generation of agricultural biotechnology are being developed to offer products with direct benefits to consumers. The focus of this thesis is the second generation, which have added health benefits. Specifically, the obstacles to commercialization of functional foods derived through biotechnology are examined. The three factors which have the potential to set back commercial introduction of functional foods derived through biotechnology are government regulatory uncertainty, consumer aversion and brand risk, and gaining access to intellectual property. The regulations governing functional foods are examined to show the regulatory ambiguity that exists in Canada. Comparisons are drawn to other nations. Literature that focuses on consumer aversion to agricultural biotechnology is reviewed, along with consumer preference studies with regards to genetically modified (GM) foods with and without health benefits. Transaction cost economics literature is used to analyse the problems related to gaining access to intellectual property and the resulting supply chain implications. Three separate theoretical models are developed to examine each of the three factors separately. Government regulatory uncertainty is incorporated into an expected profit model to show the effects of increased uncertainty on the expected profit from a new technology. A heterogeneous consumer preference model is used to show the effects of changing consumer preferences on the market share of the firm introducing the GM functional food to the market. Simulation analysis using this model shows the effects of changing variables on the market shares of three products in the market. Finally a stylized model of the vertical market shows the effects of increased transaction costs incurred in gaining access to intellectual property on the rent that is available for distribution throughout the supply chain. The results show that these factors could be an obstacle to commercial development of functional foods derived through biotechnology. When the three factors are combined, the rent available for distribution is important for the success of the supply chain. Multiple bilateral monopoly negotiations cause this rent to be less than optimal. Increased levels of government regulatory uncertainty, consumer aversion and brand risk, and costs gaining of access to intellectual property decrease the expected rent available for distribution. This could be a problem facing developers of functional foods derived through biotechnology.