Patent Pool and Deprivatization of Patents

Abstract Most economic theories on patent pools focus exclusively on patent owners’ licensing practices in explaining why patent owners voluntarily form a patent pool. Such an approach ignores the “property” root of patents. Judge Posner emphasized the importance of using economic theories on physical properties to analyze intellectual properties. Led by this spirit, I applied the evolutionary theory of property rights, formulated by Chicago School economist Harold Demsetz, to analyze the formation of patent pools. Demsetz’s theory posits that a transition in property rights structures results from interacting parties’ efforts to maximize utilities in face of changes in external factors that bear on the parties’ benefit-cost calculation. Later studies by various property rights economists have found that the existence of externalities, the cost of enforcing the right to exclude, and the economy of scale can respectively change the benefit-cost calculation of property owners/users, and drive property rights structures towards either privatization or deprivatization. I argued that the formation of patent pools can be understood as deprivatization of patents – a transition from a private property system to a commons system – in response to three phenomena in the patent system: complementary patents, high costs of enforcing patent rights, and excessive patent fragmentation. When transaction costs of patent pooling are outweighed by its benefits, we can expect to see more patent pools being established.