Managing Cartels Through Patent Pools

Abstract

Patent pools can serve many purposes. Some of them are procompetitive while others anticompetitive. This article addresses one aspect of patent pools that has not received much attention—a patent pool’s role in stabilizing a cartel of downstream producers. The article first reviews the problem of cartel cheating, which threatens the stability of cartels. Any potential mechanisms that cartels can use to increase stability face three main challenges: (1) the cost of management, (2) agency costs, and (3) the requirement of secrecy. Our analysis shows that a vertically-related firm is an ideal candidate to manage a cartel. Our analysis has important implications for our understanding of patent pools. Because downstream producers were in a vertical relationship with a patent pool, they can create a patent pool to facilitate collusion. The article argues that the vertical licensor-licensee relationship gives a patent pool greater chances to evade antitrust scrutiny and more latitude in monitoring downstream producers’ performances. It also argues that the aggregation of patents in a patent pool would make it more effective in punishing cartel cheating. The article’s main finding that a patent pool is uniquely suited to manage a downstream cartel is a reminder that an overly permissive view of patent pools can invite anticompetitive hazards.

Keywords: patent pool,cartel, cartel manager, agency cost, vertical relationship

JEL Classification: K21, L41, O34