Academic journal article Economic Inquiry

Patent Pool Formation and Scope of Patents

Academic journal article Economic Inquiry

Patent Pool Formation and Scope of Patents

Article excerpt

I. INTRODUCTION

In some areas of research (e.g., biotechnology), follow-up innovations may be built on several basic innovations and might not be developed without them. Inventions such as methods to isolate and locate gene sequences have no value by themselves, but they permit the development of subsequent valuable applications. Furthermore, basic innovations and applications are usually developed by different companies. (1)

Two important incentive problems emerge from sequential innovations. First, basic innovators must be given enough incentive to promote their innovations. The literature on sequential innovation has mainly focused on how to protect the first generation of innovators against future innovators. In other words, it is concerned with the transfer of profit from second generation innovators to the initial innovators in order to promote basic innovations. (2) Green and Scotchmer (1995) show that first generation innovators should be given broad protection when second generation innovations can only be obtained by an outsider. (3)

Second, follow-up innovations may not be brought about when developers decide not to pursue research if it is built on several basic innovations as in Merges and Nelson (1994). Indeed, if basic patents are too broad, follow-up innovators may have to pay too many fees to be able to develop applications. This phenomenon, referred to by Heller and Eisenberg (1998) as the "tragedy of anticommon," depicts a situation in which there are too many doorkeepers, and to build on previous innovations an innovator needs the permission of too many patentholders. This second problem is especially acute in biotechnology. For instance, a survey of laboratory physicians shows that because of patents one-fourth have abandoned a clinical test that they have developed, and almost one-half report that they have not developed a test for fear that they would be sued. (4)

In biotechnology, and more generally in fields where innovation is cumulative and pyramidal, one of the solutions is to license patents in a patent pool. A patent pool is an agreement between two or more patentholders to license one or more of their patents to one another or to third parties. (5)

In this paper, we examine how a patent pool can rectify the lack of developer incentives to invest in an application when basic innovators cannot develop follow-up applications. This situation is relatively common as basic innovators may be universities or public research laboratories that do not have the ability to develop applications. We investigate whether broad basic patents are necessary to provide enough incentive to basic innovators, as is the case in the Green and Scotchmer (1995) model. Furthermore, we wonder what kind of pool will emerge. In other words, are patents more likely to be broad or narrow in a patent pool? We consider a model in which there are two patentholders of basic innovations that are mainly research tools, with null market values, but that permit a third firm to develop an application. In this setting, we show that patent pools are more likely to be formed either with patents of very different breadth or, on the contrary, with similarly broad patents.

In 2001, several companies (GE Healthcare, formerly Amersham Biosciences, Biolmage A/S, and Invitrogen IP Holdings, formerly Aurora Biosciences Corporation) and Columbia University agreed to pool several of their patents on green fluorescent protein (GFP). This is a fluorescent reporter molecule used in drug discovery to create a detailed picture of how potential drugs affect the function of protein. The patent pool contains several U.S. patents, as well as European and Japanese patents. "All users of GFP are required to obtain a license to use the technology prior to starting research work" (GE Healthcare conditions for licensing). (6) Therefore, one can consider a patent pool as an ex ante agreement offered to any potential developers. …

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