16

The Basic Analysis of Anticompetitive Effect on Patent Pools
Research Fellow: Seiji Yamada

In this study, patent pool will be examined, which allows patentees to pool their patents and grant
licenses to companies that hope to be licensed. In recent years, technical advancement and segmentation
have accelerated especially in the fields where technological innovation is rapid. Consequently, companies
often find their own patents insufficient to develop new products. Any company planning to develop a new
product is required to carry out licensing negotiations with many patentees. The negotiation-related costs
would impose a great burden on the company. As a solution, patent pools are gaining attention. However,since the purpose of patent pools is to centrally manage patents owned by many patentees, some people areconcerned that patent pools could function as cartels and have an anticompetitive effect. In this study, it will
be examined by using an economic theory model whether patent pools have a latent anticompetitive effector not. Furthermore, based on various patent data, we will analyze whether patent pools have affected
corporate research and development activities.

Ⅰ Necessity of Patent Pools andTheir Anticompetitive Effect1

Issues related to recent research anddevelopment activities

In recent years, research and development
activities and product development activities
have been hindered by two obstacles: a “patent
thicket” and the “tragedy of the anticommons.”(*1)
Today, in order to conduct research andproduct development activities, companies need
to use many patents for highly advanced
technologies in an extremely wide range of fields.
Such technical advancement and segmentationnecessitateslicensingnegotiations
withpatentees, which would require companies tobear a procedural burden as well as a monetaryburden such as technology search costs. Suchburdens are said to have hindered corporate
research and product development. This situation
is called “patent thicket,” implying that thecorporate ability to carry out research andproduct development would be greatly impairedby a dense web of patents. Another situation thathinders research and product development iscalled “the tragedy of the anticommons,” which isa concept established by Heller and Eisenberg(1998). This concept illustrates a case where
research and product development of companies
are inhibited if a great number of patents are

granted in a particular field in a concentrated
manner because companies engaged in researchand product development activities in that fieldface a higher risk of infringing rights of othercompanies and consequently refrain from using
patents in said field.
Such slowdown of research and productdevelopment caused by a “patent thicket” and the“tragedy of the anticommons” is attributable tothe fact that many companies individually holdpatents. The technical advancement andsegmentation have put an end to the era where alarge company monopolizes all the technologies
in related fields. Now, we are in the era where a
specialized company only owns the technologies
related to its specialized field. As a result,companies are given a strong incentive to provide
mutual technical support.
2

Patent pool as a solution

As described above, since corporate researchand development activities are hindered by a“patent thicket” and the “tragedy of the
anticommons,” technical cooperation among
companies is indispensable. As a means of suchcooperation, a patent pool, which is a topic of thisstudy, is gaining attention. A patent pool is a typeof license system that allows patentees to pool allof the patents related to a new product andlicenses a package of those patents to a company
that hopes to be licensed.(*2) Each company simply(*1) Comprehensive surveys on a “patent thicket” and the “tragedy of the anticommons” are Shapiro (2001) and Heller
and Eisenberg (1998).
(*2) According to “Guidelines for the Use of Intellectual Property under the Antimonopoly Act”, which was publishedby Japan Fair Trade Commission in 2007, a patent pool refers to a business activity in which multiple parties
holding the rights to a certain technology concentrate their rights itself or the rights to license the technology in a

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needs to conclude a license agreement with acompany administering a patent pool in order toreceive various benefits from the patent poolsystem such as a cut in technology search costs,
a decrease in transaction costs, enhancement in
the motivation to invest in research anddevelopment, avoidance of patent infringement
lawsuits,
andpromotionoftechnical
standardization. These benefits would facilitate
the development of new products. Famous patentpools include the MPEG2 patent pool containing
patents
relatedtoimage
compression
technologies, the DVD patent pool containing
DVD-related patents, and the 3G patent platform
containing patents related to the third generation
mobilecommunications.
Many
of
the
currently-operated patent pools seek technicalstandardization in the electric and electronic field
and the telecommunications field, where higher
product connectivity and compatibility areespecially beneficial. The patent pools in theelectric and telecommunication industries are
said to have greatly benefited not only producers
but also consumers. From the viewpoint of
producers, those patent pools have contributed to
cost
reductionbypromotingtechnical
standardization. For consumers, those pools haveenhanced product usability. The success of thosepatent pools, which was highly praised by thecompetition authorities, is speculated to havepromoted the formation of patent pools in those
fields.
3

Anticompetitive use of patent pools

Despite the aforementioned benefits, patentpools could have a strong anticompetitive effectbecause they are designed to centrally manage
the intellectual property rights owned by many
patentees. (*3) For example, a patent pool could bea breeding ground for such illegal acts as
imposing unfair transactional restraints aimed tolimit the adoption of any technology thatcompetes with any of the technologies containedin the patent pool or private monopolizationcommitted in the form of exclusion of newcomers
and constraint of the patent pool participants.

Historically, most countries have restricted
anticompetitive
monopolization
underacompetition law. While patent pools centrally
manage intellectual property rights, it does notnecessarily reinforce monopoly power. This isbecause patents themselves are properties thatthe patentees are entitled to monopolize under
the patent law. It is not certain whether exclusive
sales of such monopolized properties would reallyreinforce monopoly power. Therefore, we need tocarefully examine how to handle patent pools
under a competition law.
4

Discussion on package license menus

In recent years, patent pools have beencreated specifically for certain technical standards.
The patents contained in each of those patentpools are limited to the mutually supplementary
patents that are indispensable to satisfy atechnical standard due to the restrictions
imposed by the antitrust law. In principle, thosepatents need to be licensed to a company as a
package. However, such a package licensing
system, which licenses all the patents containedin a patent pool as a package, has its limitations,especially in this age of technical advancement
and segmentation. For example, in the case of theDVD patent pool, a technical standard covers
various products. One technical standard isapplicable to many product categories such as
DVD players and DVD disks. Consequently, eachlicensee needs to selectively use patents
contained in the patent pool according to the
product category to which its products underdevelopment pertain. A package licensing system
would force companies to purchase unnecessary
patents as well. As a result, such a license would
fall under the case of a tying arrangement
between patents or a case of a mandatory package
license, which are included in “Nine Prohibited
Acts Related to Intellectual Property Licensing(Nine no-no’s).” (*4) This case of package licensing
could be regarded as a sale of patents under atying arrangement because licensees are forced
to purchase unnecessary patents. As a means ofpreventing a sale of patents under a tying

particular corporation or organization so that the body may grant the necessary licenses to the members of thepool or others (3-2-(1)). This study regards the patent pool as not the licensing scheme but the organization, since
license is offered through the licensing administrator.
(*3) See “Patent and Know-How Licensing Guidelines” and “Guidelines on Standardization and Patent Pool
Arrangements”, which were published by Japan Fair Trade Commission in 1999 and 2005.
(*4) “Nine no-no’s” is nine prohibited principles related to intellectual property licensing, which were published by
DOJ in 1970’s. These nine prohibited principles are a tying arrangement between patents, assign back, assignmentof resale, unreasonable restraint of trade, exclusive license, a mandatory package license, unreasonable royalties,
product restraint, and price restraint of the patent products.
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arrangement, a licensing system called a package
license menu is gaining attention. Under this new
system, each licensee is allowed to freely selectpatents according to its needs. (*5)
5

Purpose of this study

As described above, the patent pools
established in the past have revealed that they
have both positive and negative aspects. On one
hand, patent pools are important means ofcorporate technical development activities. On
the other hand, patent pools could hinder
competition. Therefore, it is imperative todetermine clear criteria for judging whether apatent pool has an anticompetitive effect. The
purpose of this study is to examine, based on an
economic theory model, whether a patent poolhas an anticompetitive effect. First, we will
examine the pros and cons of package license
menus, which have been considered as animportant means of preventing sales of patents
under a tying arrangement. Then, we will analyze
how the relationships among the patents
contained in a patent pool determine its
anticompetitive effect. Through such analysis, wewill determine the criteria for judging whether apatent pool has an anticompetitive effect.

Ⅱ Analysis of an Anticompetitive
Effect of a Patent Pool
1

Basic conditions

The basic framework of analysis is asfollows.(*6) We calculate the total net surplus forthe following two cases respectively: a casewhere a patent pool exclusively grants licenses tolicensees and a case where each patentee
individually grants a license (a case where apatent pool does not exist). By making acomparison between the two cases in term of thetotal net surplus, we examine whether the patentpool has an anticompetitive effect. If the total net
surplus of the patent pool case exceeds that of
the non-patent pool case, the patent pool would
be considered anticompetitive. If the opposite is
the case, the patent pool would be considered
pro-competitive.

For the analysis conducted in this study, thebasic conditions for a model are set as follows forthe purpose of simplification. We assume that
only two technologies exist in an economy. Thosetechnologies are developed and patented by twocompanies respectively. A company that needs
either of the two patents for the development
may use the patent by paying a license fee to thepatentee. Each licensee obtains a gross surplus
by using the licensed technology. The grosssurplus is not affected by a combination oftechnologies but is solely influenced by the
number of technologies that the licensee hasused. Furthermore, the gross surplus is affectedby type. The technical relationships between
patents will be defined either alternative or
supplementary depending on how much the grosssurplus of a licensee has increased as a result of
adding a patent.
In the following section, we will use theaforementioned gross surplus function to make acomparison between the following two cases: acase where a patent pool has been formed and acase where each patentee grants licenses. Basedon the results of the comparison, we will analyze
whether the patent pool in question has an
anticompetitive effect.
2

Case where
licensesapatentpool

grantsIn a case where a patent pool grants licenses,
we need to take the patent pool and licensees
into consideration. The patent pool exclusively
grants package licenses for two patents. Eachlicensee pays a license fee for the patent packagethat it has purchased. The licensee can gain agross surplus by purchasing either of the two
package licenses (1, P(1)) and (2, P(2)). The
amount of gross surplus gained from an additional
patent that a licensee can obtain differs from one
patent to another. The sequence of events
presumed in the economic theory model is asfollows. First, the patent pool presents a fee
structure for its patent package licenses. Then,each licensee selects an appropriate package
license based on the fee structure. The purposeof each licensee is to maximize the net surplus byusing the licensed patent. The optimization(*5) In practice, it is observed that 12% of the pools surveyed by Lerner et al. (2003) offer the multiple package
licenses. According to Guidelines on the application of Article 81 of the EC Treaty to technology transfer
agreements (2004/C 101/02), European Commission does not deny the multiple packages licensing as the usefulway to provide licensees with a broader choice. Thus the multiple packages licensing is important for both firms
and antitrust authority.
(*6) The framework of this analysis is based on that of Lerner and Tirole (2004).

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problem faced by each licensee is a matter of
selecting a package license that would maximize
the net surplus. From the viewpoint of a patentpool, the problem of optimization is a matter of
establishing a fee structure that would maximize
the profits based on a prediction about licensees’
demand.
The findings of this analysis are as follows.
In the state of economic equilibrium where apatent pool has been formed, if the two patents
are alternative to each other for all of thelicensees, the two package licenses are both indemand. This means that the equilibrium fee
structure satisfies the first order condition of the
optimization problem of the patent pool. On theother hand, if the two patents are supplementary
to each other for all of the licensees, it is not thatboth patent packages are in demand. Only the
package (2, P(2)) is in demand. This means thatthe equilibrium fee satisfies the first ordercondition of the optimization problem of thepatent pool.
3

A case where individual patentees grant
licenses

In a case where individual patentees grant
licenses, we need to take two patentees andlicensees into consideration. Each patentee owns
one patent and grants licenses to licensees at theprice Pi (i =1,2). Each licensee pays a license fee
for the patent that it has purchased. The licensee
can obtain a gross surplus by purchasing thelicense individually. The amount of gross surplus
that a licensee can gain by obtaining an additional
patent differs from one patent to another. The
sequence of events presumed in the economic
theory model is as follows. First, a patentee
individually presents a license fee. Based on thefee, each licensee decides whether to purchasethe patent. The purpose of each licensee is tomaximize the net surplus by using the licensed
patent. The optimization problem faced by eachlicensee is a matter of selecting a package licensethat would maximize the net surplus. From theviewpoint of a patent pool, the problem of
optimization is a matter of establishing a fee
structure that would maximize the profits basedon a prediction about licensees’ demand. Eachlicensee makes a comparison between the license
fees set by respective patentees and chooses themost suitable patent.
In this analysis, we have found that, in a casewhere individual patentees grant licenses,
equilibrium does not exist if the two patents arealternative to each other, while it exists when the
two technologies are supplementary to eachother.
4

Welfare analysis

In the analysis described in the preceding
section, economic welfare is defined as the totalof the profits gained by patentees and the net
surplus obtained by all of the licensees. An
analysis of the economic welfare at the state ofequilibrium has revealed that the formation of apatent pool would decrease economic welfare if
the patents are alternative to each other, whereas
the formation of a patent pool would increase
economic
welfareifthepatentsaresupplementary to each other. In the case where
patents are alternative to each other, a licensee
would not necessarily purchase both patents
because one of the patents would bring asufficient surplus. This means that a patent witha higher price would not be purchased. Therefore,
in the state of equilibrium among individual
patentees where no patent pool has been formed,
competition among patentees on license fees isfierce. The formation of a patent pool would
hinder such competition. If patents aresupplementary to each other, a licensee would
always purchase both patents in order to obtain asufficient surplus. In this case, the patentees canraise fees without worrying about the possibilityof seeing their patents not being purchased bypotential licensees. Consequently, in the state ofequilibrium among individual patentees where nopatent pool has been formed, a license fee would
be higher than a fee that would be set by a patentpool. In short, if patents are supplementary toeach other, concentration of patent monopoly
power to a patent pool through the formation of apatent pool would contribute to lowering fees.

Ⅲ Analysis of Patent Pools andCorporate Patent Application
Filing1

Effects of a patent pool on companies

So far, we have analyzed whether a patentpool has an anticompetitive effect from theperspective of price control power based on thepresumption that a patent pool has a certain
positive effect. In this chapter, we will examinevarious patent data in order to examine whether
patent pools have really had a positive effect oncompanies, more specifically, whether they have

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truly contributed to corporate research anddevelopment activities.
As described in Chapter I, it has become
difficult for companies to carry out research anddevelopment activities and product development
activities based solely on their own patents due
to segmentation of research fields andadvancement of technology. One of the mostfundamental roles of intellectual property rights
is to strengthen the incentive for research anddevelopment by increasing the chances for
exclusive use of the results of research anddevelopment activities. However, the existenceof a “patent thicket” or the “tragedy of the
anticommons” indicates that the technologies indemand are scattered in a wide range of technicalfields. The ensuing transaction costs and license
negotiations would prevent companies from using
those technologies in an effective manner. Thismeans that the existence of intellectual property
rights could lower the incentive for research anddevelopment. In this way, a “patent thicket” canbe one of the factors that discourage corporate
research and development activities. As asolution, the use of a patent pool has been
increasing. A patent pool, which is designed tocentrally manage patents scattered in a wide
range of fields, allows companies to makeeffective use of the results of research anddevelopment activities of other companies.
Therefore, we can formulate the hypothesis thata patent pool enables companies to makeeffective use of the results of research activitiesof other companies and thereby promotes
corporate research and development activities asa whole, increasing the number of patentapplications as a result. In order to verify thishypothesis, we will examine whether the numberof patent applications filed by companies has
structurally increased after the formation of apatent pool. In particular, we will focus on the
MPEG2 patent pool, which is one of the famous
patent pools, and also on the Japanese companies
participating in the pool.

applications filed by Japanese companies(applicant
data,
applicationyear,
patentclassification, inventor data), we extracted datafrom the IIP Patent Database (Institute ofIntellectual Property) and the JPO Industrial
Property Digital Library.
In order to prepare a data set for analysis, we first
identified patent classifications of the patents
comprising the MPEG 2-related technologies byusing the data on the patents contained in the
MPEG2 patent pool, which is the subject of thisanalysis. The patents used to cover the MPEG2technology can be roughly categorized into tenclassifications of two technical fields, i.e., field G(physics field) and field H (electric field).
Similarly, we identified the licensors andlicensees by using the MEG2 patent pool list.
More specifically, we checked the website of eachcompany in order to determine whether eachlicensor or licensee is a Japanese company. The
licensors and licensees subject to this analysis
consisted of 104 Japanese companies including
Japan-based affiliates of foreign companies. These
companies were extracted from the 1,638
licensorsandlicensees(nooverlaps)
participating in seven patent pools operated by
MPEG-LA (MPEG2, ATSC, AVC/H.264, VC-1,
MEPEG-4 VIDUAL, MEPEG-2 SYSTEMS, 1394).
We extracted patent data from the IIP Database
to obtain information on the patents owned by the
104 licensors and licensees that can be
categorized into 10 patent classifications of two
technical fields. The extracted patent information
covered the application number, application date,patent number, registration date, IPC, applicant
data, and inventor data for each patent. The
application years subject to extraction were from1994 to 2000. Similarly, we extracted informationon the number of inventors of each company fromthe IIP Database based on the names of theapplicants identified in the aforementioned
process. In the end, we are left with a total of 34
companies as samples consisting of eightlicensors and 26 licensees.

2

3Outline of the data

The main sources of the patent data used inthis study are as follows. We used the data
provided by MPEGLA as a source of informationon the licensors and licensees of MPEG2-related
patents.(*7) Regarding information on patent

Estimation
variables

methodandexplaining

We are going to conduct a panel data analysis
to examine whether the formation of the MPEG2
patent pool had an effect on corporate patentapplication filing. In general, in order to identify(*7) The source of information on the licensors and licensees of MPEG2-related patents be available in the following
homepage; http://www.mpegla.com/index1.cfm.

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the characteristics based on attributes, it iscommon to conduct a cross section analysis on
attribute-based data at a specific point of time.
However, a cross section analysis would not beable to reflect each attribute. On the other hand,a chronological analysis would not be able toanalyze common factors based on attributes.
Therefore, for the purpose of assessing corporate
patent application filing before and after theformation of a patent pool, it would be appropriate
to conduct a panel analysis, which can analyzeboth attribute-based individual factors andchronological common factors. In this study, weare going to focus on the number of patentapplications, which reflects the intensity ofcorporate research and development activities
and the number of inventors, which reflects thesize of their research departments. We will
analyze whether those variables had any effect on
corporate research and development activities
after the formation of a patent pool.
In this analysis, we are going to use thenumber of MPEG2-related patent applications(MPEG2-related patents) as an explained variable,
while using the following three variables as
explaining variables: the number of inventors of
MPEG2-related technologies (inventor), a time
dummy variable (time dummy) indicating thetime of patent pool formation, and a dummy
variable (applicant dummy) indicating whether
the company in question is a licensor or not. In
this analysis, we estimated two models as
generally done in a panel data analysis. One of
the models is called a fixed effect model, in which
the estimate equation is solved on thepresumption that a certain fixed effect isexperienced by each company throughout a year.
The other model is a random effect model, in
which a fixed effect experienced by each company
is estimated as a random variable. The Housman
Test has revealed that the statistical reliability ofan estimate equation is the highest in the fixed
effect model.
4

Results of estimation

According to the results of estimation, it is
not clear whether the formation of a patent poolhas structurally changed the number of patentapplications filed by the licensors. However, it
has become clear that the number of patentapplications filed by the licensees has been
structurally changed after the formation of thepool. With regard to the total number of patentapplications, the time dummy variable had astatistically significant effect. This indicates thatthe number of patent applications filed in therelevant patent classifications by licensors andlicensees has structurally risen since theformation of the pool. According to the estimation
results for each applicant type, as far as licensors
are concerned, a positive relationship is observedwith the number of patent applications and thenumber of inventors. However, we did notobserve any statistically significant effect thatwould indicate a structural change caused by apatent pool. On the other hand, with regard tolicensees, both the time dummy variable and thenumber of inventors have a statisticallysignificant effect. As far as licensees areconcerned, the number of inventors has apositive relationship with the number of patentapplications at a coefficient of 1.51. Generally, acompany preparing a patent application indicatesthe names of researchers of its research
department in the application form as the namesof inventors. Therefore, the number of inventors
may be presumed to be the size of research anddevelopment department of each company. Basedon this presumption, it would be appropriate toconsider that each licensee increases the numberof patent applications by expanding the size of its
research and development department after theformation of a patent pool.

Ⅳ Results andThis Study
1

ContributionofAnalysis of the anticompetitive effect ofa patent pool

In Chapter II, we defined the state ofequilibrium in two cases respectively: a casewhere patents are placed in a patent pool and acase where patents are licensed by individual
patentees. Then, we made a comparison between
the two. Since the characteristics of theequilibrium would differ depending on whether
patents are alternative or supplementary to eachother, each case was analyzed separately. The
three major findings of this analysis are as follows.
First, in the state of patent pool equilibrium, if
the patents are alternative to each other, thepatent pool would present a license menu. If thepatents are supplementary to each other, thepatent pool would offer a single package without
presenting a license menu. Second, in the state ofequilibrium of individual patentees where nopatent pools have been formed, if the patents arealternative to each other, there would be no● 121 ●IIP Bulletin 2009

license price that could achieve equilibrium
among the patentees. On the other hand, if thepatents are supplementary to each other, there
would be a license price that could achieve
equilibrium among the patentees. Third, if thepatents are alternative to each other, theformation of a patent pool would decrease
economic welfare, whereas it would increase
economic
welfareifthepatentsaresupplementary to each other.
Based on these findings of this analysis, thefollowing two conclusions may be formed. First,
according to the above-described analysis result,the formation of a patent pool containing
alternative patents would decrease economic
welfare, whereas it would increase economic
welfare in the case of a patent pool containing
supplementary patents. This finding suggeststhat market competition policies should beformulated in consideration of the type of patents.
In other words, the competition authorities
should restrict patent pools containing alternative
patents, while promoting patent pools containing
supplementary patents. In the case of alternative
patents, the absence of a patent pool would leadto a decrease in license prices. In contrast, if apatent pool containing alternative patents isformed, such competition pressure would ease,causing an increase in license pieces. On theother hand, in the case of supplementary patents,
a license price that would be set in a case where apatent pool centrally exercises monopoly powerover those patents would be lower than a pricethat would be set in a case where patentees
individually exercise monopoly power over theirpatents. This analysis result clearly indicates therelation between the type of patents and theeffect of a patent pool on economic welfare. Thisconclusion would provide the competition
authorities with a useful criterion for judging apatent pool and would give the authorities a
concrete basis for devising measures inconsideration of patent types.
The second conclusion is as follows.
According to the analysis result, in the state ofpatent pool equilibrium, if the patent poolcontains alternative patents, the pool would
present a package license menu, whereas if it
contains supplementary patents, it would notpresent such a menu. This result suggests that it
might be possible to speculate whether a patentpool has an anticompetitive effect or not based on
the size of demand for package license menus. If
a competition policy is trying to promote patentpools containing supplementary patents, it would

IIP Bulletin 2009

be necessary to judge whether the patents inquestion are alternative or supplementary to eachother. However, there is no direct indicatorshowing the type of patents. According to theanalysis result, a patent pool that presents apackage license menu may be judged as an
anticompetitive patent pool. This is an important
finding useful for making at least a temporary
judgment as to the type of patents.
2

Analysis of patent pools and corporate
patent application filing

In Chapter III, we conducted a panel data
analysis (fixed effect model) to examine whether
the formation of a patent pool changed corporate
patent application filing. This analysis has
statistically proved that the formation of a patentpool had a positive effect on corporate patentapplication filing and, more importantly, that suchan effect differed depending on applicant type.
The formation of a patent pool had no effect onlicensors, whereas it had an effect on licensees.
This indicates that licensees regarded theformation of a patent pool as an opportunity todevelop MPEG2-related technologies and became
more motivated to obtain patents for thosetechnologies. The ensuing increase in thenumber of patent applications for related
technologies is considered to have caused theaforementioned statistically significant effect.
These findings have shown that the formation ofa patent pool is effective for licensees. These
analysis results reflect the success of patent poolformation in the electronic industry and theinformation and telecommunications industry,where a patent thicket is intertwined withtechnical standardization. Patent pools, whichhave been proven to be successful, are expected
to go beyond the boundaries of the electricindustry
andtheinformationandtelecommunications industry and establish theirpresence in other fields as well. If a patent pool isgoing to be created in any other field, it would benecessary to carefully design the pool tostimulate the incentive of patent applicants,
especially licensees.

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