Patent Pools and Innovation in Substitutes - Evidence from the 19th Century Sewing Machine Industry

Abstract

Patent pools, which combine complementary patents of competing firms, are expected to increase overall welfare – but potentially discourage innovation in substitutes for the pool technology. This paper exploits a new historical data set on changes in patenting and firm entry for a clearly defined pool technology and substitutes in the 19th century sewing machine industry to investigate the effects of a pool on innovation in substitutes. This analysis reveals a substantial increase in innovation for an – albeit technologically inferior – substitute technology. Historical evidence suggests that the creation of a pool diverted innovation towards an inferior substitute by creating differential license fees and litigation risks, which made it more difficult for outside firms to compete directly with the pool technology.

Keywords: Patent Pools, Innovation, Patents, Intellectual Property, Economic History

JEL Classification: K00, N00, N41, 031