Sequential innovation and the patent-antitrust conflict

I examine antitrust policy in a model of cumulative innovation,arguing that collusion between successive patentees (e.g. throughpatent pools or cross-licensing agreements) may be sociallybeneficial under certain circumstances, even if the patentsinvolved are competing rather than complementary or blocking.Collusion stimulates investment in second-generation innovations,which is welfare-improving if their social returns exceed privatereturns. However, it discourages investment in first-generationinnovations. Thus, for the pooling of subsequent patents tobe beneficial, the non-appropriable returns from the secondinnovation must be large and it must be costly to achieve bycomparison with the first.