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Economics of Patent Pools When Some (but not all) Patents are Essential

Nov 2006
Working Paper
By  Daniel Quint
Patent pools are agreements by multiple patent owners to license certain patents to third parties as a package, and often form in conjunction with the development of a technological standard. A key distinction made by regulators—between patents which are essential to a standard and patents for which suitable substitutes exist—has not been captured in existing economic models. I present a model of competition among differentiated technologies, in which some patents are essential and some are not. I show that pools of essential patents are Pareto-improving whenever they occur, while pools of nonessential patents can be welfare-negative, even when the included patents are all complements. I discuss conditions under which certain pools are likely to form, the “outsider problem” which makes some pools inefficiently small, and the effects of compulsory individual licensing.