Adverse Effects of Patent Pooling on Product Development and Commercialization

Abstract

The conventional antitrust wisdom is that the formation of patent pools is welfare enhancing when patents are complementary, since the pool avoids a double-marginalization problem associated with independent licensing. The focus of this paper is on (downstream) product development and commercialization on the basis of perfectly complementary patents. We consider development technologies that entail spillovers between rivals, and assume that final demand products are imperfect substitutes. When pool formation facilitates information sharing and either increases spillovers in development or decreases the degree of product differentiation, patent pools can adversely affect welfare by reducing the incentives towards product development and product market competition-even with perfectly complementary patents. This modifies 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.

Patent Pools, Competition, and Innovation—Evidence from 20 US Industries under the New Deal

“…Llanes and Trento (2012) show that innovators are less likely to join a pool with more members because revenue would be shared with more firms. Jeitschko and Zhang (2012) demonstrate that pools of complementary patents may weaken the incentive of downstream firms to invest in R&D if they create knowledge spillovers that lead to a decline in product differentiation and thereby reduce firms' profits.…”

Market Failures and Market Framings: Can a market be transformed from the inside?

“…Patent pools can bring economic benefits to patent originating enterprises through the incomes generated from licensing, which are generally shared between the patent holders, especially if the patents in the pool are complementary in nature (Lerner & Tirole, 2005). However, some voices also highlight their inherent instability, as the very logic of a patent pool arguably stands in direct tension with the idea of intellectual property rights (Aoki & Schiff, 2008; Jeitschko & Zhang, 2014). Due to anti-competitiveness and anti-trust concerns, patent pools are typically quite restrictive regarding the IP admitted.…”

Bundling and joint marketing by rival firms

“…In contrast to our work, these papers abstract from price discrimination as a motivation for joint marketing. 7 Somewhat related to joint marketing arrangements are several other recent papers on joint pricing in the context of patents and patent pooling (e.g., Lerner & Tirole, 2004;Cheng & Nahm, 2007;Choi, 2010;Rey & Tirole, 2013;Jeitschko & Zhang, 2014). Although this work generally does not consider price discrimination, Lerner and Tirole (2004) and Rey and Tirole (2013) examine how individually set royalty rates interact with pricing in patent pools.…”