Patent Pools, Competition, and Innovation—Evidence from 20 US Industries under the New Deal (original) (raw)

Patent pools, which allow competing firms to combine their patents as if they are a single firm, have become a prominent mechanism to address problems with the current patent system. Pools are expected to encourage innovation by limiting litigation risks for pool members and by lowering transaction costs and license fees for outside firms. But pools may also have important anti-competitive effects, as they encourage cooperation among competing firms. Today and nearly always since the Sherman Act in 1890, antitrust regulation is in place to prevent such anti-competitive effects, making it impossible to observe what would happen if pools were left free reign. New Deal policies in the 1930s, which aimed to encourage economic recovery, relaxed antitrust regulation and allowed anticompetitive pools to form. This paper examines the effects of such pools on innovation. Difference-indifference estimates that compare changes in patent applications in pool technologies with a control group of related technologies in the same industry indicate a 16 percent decline in innovation after the formation of a pool. This decline is strongest for technologies that pool members competed to improve before the creation of a pool.