Adverse Effects of Patent Pooling on Product Development and Commercialization

Adverse Effects of Patent Pooling on Product Development and Commercialization by Thomas D. Jeitschko (Michigan State) and Nanyun Zhang (Townsend) 

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 (down- stream) product development and commercialization on the basis of perfectly complementary patents. We consider development technologies that entail spillovers between rivals, and assume that 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 act welfare by reducing the incentives towards product development and product mar- ket competition|even with perfectly complementary patents. This models 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.