Adverse Effects of Patent Pooling on Product Development and Commercialization

34 Pages Posted: 26 Aug 2011 Last revised: 9 Jan 2014

Thomas D. Jeitschko

Michigan State University - Department of Economics

Nanyun Zhang

Towson University

Date Written: December 2013

Abstract

The conventional 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. This conventional wisdom relies on the effects that pooling has on downstream prices. However, it does not account for the potentially significant role of the effect of pooling on innovation. 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. The analysis modifies and even negates the conventional wisdom for some settings and suggest why patent pools are uncommon in science-based industries such as biotech and pharmaceuticals that are characterized by tacit knowledge and incomplete patents.

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

JEL Classification: L1, L2, L4, L6, D2, D4

Suggested Citation

Jeitschko, Thomas D. and Zhang, Nanyun, Adverse Effects of Patent Pooling on Product Development and Commercialization (December 2013). Available at SSRN: https://ssrn.com/abstract=1917393 or http://dx.doi.org/10.2139/ssrn.1917393

Thomas D. Jeitschko

Michigan State University - Department of Economics ( email )

110 Marshall-Adams Hall
East Lansing, MI 48824
United States
517-355-8302 (Phone)
517-432-1068 (Fax)

HOME PAGE: http://www.msu.edu/~jeitschk/

Nanyun Zhang (Contact Author)

Towson University ( email )

8000 York Road, ST 100A
Towson, MD 21204
United States

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