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. through patent pools or cross-licensing agreements) may be socially beneficial under certain circumstances, even if the patents involved are competing rather than complementary or blocking. Collusion stimulates investment in second-generation innovations, which is welfare-improving if their social returns exceed private returns. However, it discourages investment in first-generation innovations. Thus, for the pooling of subsequent patents to be beneficial, the non-appropriable returns from the second innovation must be large and it must be costly to achieve by comparison with the first.