Economics of Patent Pools When Some (But Not All) Patents Are Essential

Patent pools are agreements by multiple patent owners to license some set of patents to third parties as a package; in recent years, several have formed in conjunction with emerging technological standards. A key distinction made by regulators – between patents which are essential to a standard and patents for which suitable substitutes exist – has not been addressed in the theoretical literature. I present a model of imperfect competition where “products” are overlapping bundles of components from different suppliers; essential components are those which are necessary inputs for all of the products. Applying the model to patent pools, I show that pools of essential patents are Pareto-improving whenever they occur, while pools including nonessential patents can be welfare-negative. Contrary to earlier results, the latter can hold even when pools are limited to patents which are pairwise complements, and even with pools which are stable under compulsory individual licensing.