Tuesday, April 19, 2011
Posted by D. Daniel Sokol
Thomas Jeitschko (Antitrust Division, U.S. Department of Justice and Department of Economics, Michigan State University) and Nanyun Zhang (Department of Economics, Towson University) explore Patent Pools and Product Development.
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. 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 nal demand products are imperfect substitutes. If pool formation either increases spillovers in development or decreases the degree of product dierentiation, pool formation can actually adversely aect overall welfare by reducing incentives towards product development and product market competition|even with perfectly complementary patents. This significantly modifies and possibly even negates the conventional wisdom for many settings. The paper provides insights into why patent pools are uncomm! on in science-based industries such as biotech, despite there being strong policy advocacy for them.