Patent pool enhances market competition

This article investigates a pool of substitute I patents that enable firms to reduce marginal costs of production. Contrary to the general belief, it is shown that a pool of substitute patents may promote competition under certain conditions, thereby enhancing social welfare in the product market. The intuition is that when firms compete in licensing fees, resultant low licensing fees discourage firms from licensing to outside firms. This leads to fewer licensees than when a patent pool is formed. (C) 2004 Elsevier Inc. All rights reserved.