Early commitments help patent pool formation

Abstract

This paper explores in what circumstances patent owners can be expected to join unilaterally a patent pool. We develop a simple model in which owners of patents reading on a standard grant licences to competing manufacturers. Manufacturers must sink a fixed cost to enter the market for standard compliant products, and are thus exposed to a hold up when royalties are set after their entry. We show that the formation of non-cooperative patent pools nearly always fails if it takes place once manufacturers have incurred fixed costs - as is usually the case. By contrast, allowing the formation of patent pools ex ante facilitates the emergence of stable non-cooperative patent pools. Such ex ante pools yield lower prices and higher licensing profits than ex post patent pools would. We discuss the policy implications of these results concerning the credibilty of licensing commitments required by standard setting bodies.