Economics of Patent Pools When Some (But Not All) Patents Are Essential

Daniel Quint
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Daniel Quint: University of Wisconsin - Madison

No 177, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: Patent pools are agreements by multiple patent owners to license some set of patents to third parties as a package; in recent years, several have formed in conjunction with emerging technological standards. A key distinction made by regulators – between patents which are essential to a standard and patents for which suitable substitutes exist – has not been addressed in the theoretical literature. I present a model of imperfect competition where “products” are overlapping bundles of components from different suppliers; essential components are those which are necessary inputs for all of the products. Applying the model to patent pools, I show that pools of essential patents are Pareto-improving whenever they occur, while pools including nonessential patents can be welfare-negative. Contrary to earlier results, the latter can hold even when pools are limited to patents which are pairwise complements, and even with pools which are stable under compulsory individual licensing.

Date: 2008
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