Lucy Xiaolu Wang on the Medicines Patent Pool

Patent pools are agreements by multiple patent owners to license related patents for a fixed price. The net welfare effect of patent pools is theoretically ambiguous: they can reduce numerous transaction costs, but they also can impose anti-competitive costs (due to collusive price-fixing) and costs to future innovation (due to terms requiring pool members to license future technologies back to the pool). In prior posts, I've described work by Ryan Lampe and Petra Moser suggesting that the first U.S. patent pool—on sewing machine technologies—deterred innovation, and work by Rob Merges and Mike Mattioli suggesting that the savings from two high tech pools are enormous, and that those concerned with pools thus have a high burden to show that the costs outweigh these benefits. More recently, Mattioli has reviewed the complex empirical literature on patent pools.

Economics Ph.D. student Lucy Xiaolu Wang has a very interesting new paper to add to this literature, which I believe is the first empirical study of a biomedical patent pool: Global Drug Diffusion and Innovation with a Patent Pool: The Case of HIV Drug Cocktails. Wang examines the Medicines Patent Pool (MPP), a UN-backed nonprofit that bundles patents for HIV drugs and other medicines and licenses these patents for generic sales in developing countries, with rates that are typically no more than 5% of revenues. For many diseases, including HIV/AIDS, the standard treatment requires daily consumption of multiple compounds owned by different firms with numerous patents. Such situations can benefit from a patent pool for the diffusion of drugs and the creation of single-pill once-daily drug cocktails. She uses a difference-in-differences method to study the effect of the MPP on both static and dynamic welfare and finds enormous social benefits.

On static welfare, she concludes that the MPP increases generic drug purchases in developing countries. She uses "the arguably exogenous variation in the timing of when a drug is included in the pool"—which "is not determined by demand side factors such as HIV prevalence and death rates"—to conclude that adding a drug to the MPP for a given country "increases generic drug share by about seven percentage points in that country." She reports that the results are stronger in countries where drugs are patented (with patent thickets) and are robust to alternative specifications or definitions of counterfactual groups.

On dynamic welfare, Wang concludes that the MPP increases follow-on innovation. "Once a compound enters the pool, new clinical trials increase for drugs that include the compound and more firms participate in these trials," resulting in more new drug product approvals, particularly generic versions of single-pill drug cocktails. And this increase in R&D comes from both pool insiders and outsiders. She finds that outsiders primarily increase innovation for new and better uses of existing compounds, and insiders reallocate resources for pre-market trials and new compound development.

Under these estimations, the net social benefit is substantial. Wang uses a simple structural model and estimates that the MPP for licensing HIV drug patents increased consumer surplus by $700–1400 million and producer surplus by up to $181 million over the first seven years of its establishment, greatly exceeding the pool's $33 million total operating cost over the same period. Of course, estimating counterfactuals from natural experiments is always fraught with challenges. But as an initial effort to understand the net benefits and costs of the MPP, this seems like an important contribution that is worth the attention of legal scholars working in the patent pool area.

Merges & Mattioli on the Costs and (Enormous) Benefits of Patent Pools

Patent pools bundle related patents for a single price, reducing the transaction costs of negotiating patent licenses but creating the threat of anti-competitive harm. So are they a net benefit from a social welfare perspective? Professors Rob Merges and Mike Mattioli empirically tackle this difficult question in their new draft, Measuring the Costs and Benefits of Patent Pools, which at least for now is available on SSRN (though since its takeover by Elsevier, SSRN has conducted some egregious takedowns). Spoiler: They don't reach a one-size-fits-all answer, but they conclude that "[p]ools save enormous amounts of money," which means that "those who are concerned with the potential downside of pools will, from now on, need to make a good faith effort to quantify the costs they describe."

To address the benefit side of the equation, Merges and Mattioli interviewed senior personnel at two patent pool administrators: MPEG-LA, which administers 13 pools and provided information on the High Efficiency Video Encoding (HEVC) pool, and Via Licensing, which administers 9 pools and provided information on the MPEG Audio pool. The two pools focused on were "believed [to] represent[] the average (in terms of scale and cost) among the set of pools they administer." Based on these interviews, the authors estimate the total estimated setup expenses over a two-year period as $4.6M for HEVC and $7.8M for MPEG Audio. (Of course, pool administrators may not be the most unbiased source of information, but the authors itemize the costs in a way that makes it easy for others to check.) Merges and Mattioli then consider the counterfactual world in which all the associated licenses were negotiated individually, in which they estimate the transaction costs at $400M for HEVC and $600M for MPEG Audio. This suggests that the pools resulted in a staggering savings of about two orders of magnitude. They also estimate that the pooling arrangement reduces the ongoing transaction costs.

On the cost side of the equation, Merges and Mattioli state that patent pool critics have raised two main consumer welfare concerns: (1) combining substitutes, such that firms that should have been competitors are able to act as monopolists; and (2) grantback clauses, which could allow pools to suppress future competitors. They note that in practice, these are unlikely to be significant problems: most pools require members to make their patents available independently, which "makes technology suppression through a pool impossible." But if a pool does not have such a provision, how big are the potential consumer welfare losses?

Lampe & Moser on Patent Pools

Patent pools are often touted as a solution to patent thickets and other problems. But pools might actually discourage innovation, argue economists Ryan Lampe (DePaul) and Petra Moser (Stanford) in a pair of NBER working papers based on studies of historical patent pools. In their 2009 paper, Do Patent Pools Encourage Innovation? Evidence from the 19th-Century Sewing Machine Industry, they concluded that the first patent pool in U.S. history, the sewing machine pool, "appears to have discouraged patenting and innovation, in particular for the members of the pool." In their new (August 2012) article, Do Patent Pools Encourage Innovation? Evidence from 20 U.S. Industries under the New Deal, they "find a 16% decline in patenting in response to the creation of a pool."

Adam Mossoff- The Rise and Fall of the First American Patent Thicket: The Sewing Machine War of the 1850s

Have scholars and critics misconstrued patent thickets, incremental innovation, and patent trolling as modern phenomena? In The Rise and Fall of the First American Patent Thicket: The Sewing Machine War of the 1850s, Professor Adam Mossoff (George Mason University School of Law) thoroughly examines the history of the sewing machine and illustrates how these “modern” phenomena have long existed in innovation. In this article, Professor Mossoff provides an overwhelmingly informative historical study of the first American patent thicket and subsequent patent pool, discusses the importance of an in-depth historical analysis, and challenges a few widely-held assumptions.