Adverse Effects of Patent Pooling on Product Development and Commercialization

See, e.g. E. Bement & Sons v. National Harrow Co., 186 U.S. 70 (1902).

Standard Sanitary Manufacturing Co. v. U.S., 226 U.S. 20. For a brief synopsis of the historical development see Miller and Almeling (2007) or Gilbert (2004).

Cournot illustrates his point by considering the pricing decisions of a monopolist for copper and a monopolist for zinc who are providing the necessary inputs to a downstream producer of brass.

It should be noted that they recognize that, in the context discussed, the notions of complementarity and substitutability are not actually as clear-cut as it might seem, but a meaningful distinction is nonetheless possible on the basis of changes in patentees’ willingness to pay for additional patents.

Guideline on the Application of Art. 81 of the European Commission Treaty to Technology Transfer Agreements (2004/C 101/02), and Chapter 3 of USDOJ/FTC (2007).

See, for instance, the DVD6C patent pool that was formed by nine leading home entertainment companies to foster technology related to digital versatile discs; or the several MPEG patent pools that govern video and audio compression and transmission.

For example, the entities that had sequenced the severe acute respiratory syndrome associated coronavirus (SARS-CoV) failed to form a pool to facilitate the development of an effective vaccine. Similarly, the development of a DNA microarray to arrange 300 cancer-associated genes would facilitate the diagnosis and possible treatment of many cancers; yet such a DNA chip would require pooling widely dispersed patents, which has not happened. Also, patents on receptors are useful for screening potential pharmaceutical products. To learn as much as possible about the therapeutic effects and side effects of potential products at the pre-clinical stage, firms want to screen products against all known members of relevant receptor families. But when these receptors are patented and controlled by different owners, gathering the necessary licenses may be difficult. See, e.g. USTPO’s white paper on the subject, Clark et al. (2000), Gaulé (2006), Ménièr (2008), Verbeure (2009), van Zimmeren et al. (2011), van Overwalle (2012) or Jeitschko and Zhang (2013).

A rare exception is the current attempt by MPEG-LA’s Librassay to institute a genetic diagnostic testing patent pool. It is no coincidence that this is tied to molecular diagnostics testing as here there is a clear commercial application that requires less research (Jeitschko and Zhang 2013).

The aforementioned USPTO white paper on patent pools in biotechnology (see Footnote 7) also cites information sharing specifically as an advantage of pool formation (id. p. 10).

Kamien, Muller, and Zang (1992) consider an extreme version of this where industry-wide joint ventures yield complete spillovers. See also Erkal and Minehart (2014), who present a dynamic model of research exchange among rivals and consider the endogenous timing of information sharing.

Of course, if the pooling incentives of patent holders and firms are perfectly aligned (e.g. if the licensors are also licensees, i.e. the case of cross-licensing), then our model can also be interpreted as a version RSJVs similar to Greenlee and our insights carry over to such a setting.

Thus, we assume that the upstream IP-holders are non-practicing entities. In biotech and pharmaceuticals, many IP-holders are indeed small research laboratories or universities that do not themselves commercialize. Nevertheless, the findings of the model apply to more complex settings in which patent holders are also developers and manufacturers. In those cases what is found in the present setting for firms then applies more broadly to the patent holders as well. This is akin to the case where licensing fees are used (rather than royalties) – a case that is discussed in more detail in Jeitschko and Zhang (2011).

On the role of information exchange and spillovers in R&D, see, e.g. Severinov (2001).

Ghosh and Morita (2012) also study possible trade-offs concerning development collaboration and product differentiation, using a circular city model with a focus on how insiders differ from outsiders. Bourreau and Doğan (2010) allow for cost sharing in development and study how increased collaboration in development leads to diminished product differentiation. However, effort is not part of the development process. In contrast to these approaches that postulate a positive relationship between collaboration and product similarity, Lin and Saggi (2002) consider the case where firms coordinate to increase product differentiation.

The effect of the degree of product differentiation on development efforts has also been examined elsewhere, with some models specifically examining endogenous product differentiation. Amir, Evstigneev, and Wooders (2003) use generic profit functions and consider differences between cooperative and non-cooperative R&D. As for the interplay of effort and spillovers in development, Moltó, Georgantzís, and Orts (2005) have a closed-form model with a result that is similar to one of ours (albeit in a very different set-up) in that the social planner may wish to limit the extent of spillovers in development, as these lead to under-performance due to free-riding.

The first-order conditions are sufficient and yield an interior solution (i.e. positive equilibrium effort) provided that – an assumption that we henceforth maintain.

The proofs are in Appendix B.

A more detailed analysis of spillover and differentiation effects that abstracts from the issue of royalty stacking is in Jeitschko and Zhang (2011).

The examples were calculated and the figures were generated using Mathematica^®. The associated files are available from the authors upon request.