Patent pools and dynamic R&D incentives

Patent pools are cooperative agreements between two or more firms to license their related patents as a bundle. In a continuous-time model of multistage innovations, we characterize firms’ incentives to perform R&D when they anticipate the possibility of starting a pool of complementary patents, which can be essential or nonessential. A coalition formation protocol leads the first innovators to start the pool immediately after they patent the essential technologies. The firms invest more than in the no-pool case and increase the speed of R&D for essential technologies as the number of patents progresses to the anticipated endogenous pool size, to the benefit of consumers. There is overinvestment in R&D compared to a joint profit-maximization benchmark. If firms anticipate the addition of nonessential patents to the pool they reduce their R&D efforts for the essential patents at each point in time, resulting in a slower time to market for the pooled technologies.