Patent Pools and Innovation

19 February 2009 at 2:55 pm 1 comment

| Dick Langlois |

In a (fairly) recent paper, which may soon see the light of day in volume from Cambridge University Press, I argued against Alfred Chandler’s analysis of RCA and the early American consumer electronics industry. In Inventing the Electronic Century (2001) Chandler holds that, by creating capabilities (notably central R&D capabilities), RCA was the fountainhead of innovation in that industry, at least until after World War II. I argue instead that, as a government-created patent pool, RCA in fact retarded innovation in what was actually a fairly modular industry. Recently, I came across a paper by two economists from Stanford called “Do Patent Pools Encourage Innovation? Evidence from the 19th-Century Sewing Machine Industry.” They provide quantitative evidence that an earlier patent pool (also) retarded innovation. Here is the abstract:

Regulators favor patent pools to encourage innovation in industries where overlapping patents and excessive litigation suppress innovation. With patent pools, member firms share patents freely with each other and offer one-stop licenses to outside firms. Thus patent pools are expected to promote innovation by reducing litigation risks for pool members and lowering transaction costs for outside firms. We examine this prediction at the example of the first patent pool in U.S. history, the Sewing Machine Combination (1856-1877). Our data confirm that pools reduce litigation risks for members and that pool members patent more in the years leading up to the pool. Pool members, however, patent less as soon as the pool is established and only resume patenting after the pool dissolves. We construct objective measures of performance to examine whether such changes reflect changes in strategic patenting or actual effects on innovation. Performance data suggest that innovation slowed as soon as the pool had been established and resumed only after the pool had been dissolved. Why might patent pools discourage innovation? Our data indicate that pools may discourage innovation by increasing litigation risks for outside firms and by diverting research by outside firms to inferior technologies.

This last point also held true in the case of RCA: as RCA controlled all of the key patents for the radio and licensed them only en bloc, there was no incentive for outsiders to create new products that would compete with only one or two of RCA’s technologies.

Entry filed under: - Langlois -, Business/Economic History, Innovation. Tags: .

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1 Comment Add your own

  • 1. Michael F. Martin  |  19 February 2009 at 7:50 pm

    In Chapter 1 of The Science of Success, Charles G. Koch describes how his father struggled to compete with a patent pool in in the oil industry in the 1920s also. Patent pools were historically a great way to enforce a cartel agreement. But the industry structure is very different now from what it was then, and patent pools are a very functional way to deal with transactions costs. Patent owners just have to be aware that they may be subject to challenge by competition regulatory authorities.

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