Adverse Effects of Patent Pooling on Product Development and Commercialization

Thomas D. Jeitschko and Nanyun Zhang, EAG 12-5, July 2012
Published in The B.E. Journal of Theoretical Economics, Volume 14, Issue 1, Pages 27–57 (2014).
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The conventional antitrust wisdom is that the formation of patent pools is welfare en- hancing when patents are complementary, since the pool avoids a double-marginalization problem associated with independent licensing. The focus of this paper is on (down- stream) product development and commercialization on the basis of perfectly comple- mentary patents. We consider development technologies that entail spillovers between rivals, and assume that nal demand products are imperfect substitutes. When pool formation facilitates information sharing and either increases spillovers in development or decreases the degree of product dierentiation, patent pools can adversely aect welfare by reducing the incentives towards product development and product mar- ket competition|even with perfectly complementary patents. This modies and even negates the conventional wisdom for some settings and suggests why patent pools are uncommon in science-based industries such as biotech and pharmaceuticals, despite there being frequent policy advocacy for them.

Keywords: Patent Pools, Research and Development, Innovation, BioTechnology, Electronics

JEL classifcations: L1 (Market Structure, Firm Strategy, and Market Performance), L2 (Firm Objectives, Organization, and Behavior), L4 (Antitrust Issues and Policies), L6 (Industry Studies: Manufacturing), D2 (Production and Organizations), D4 (Mar- ket Structure and Pricing)

Updated July 24, 2015