Economics of Patent Pools When Some (but Not All) Patents Are Essential

Several recent technological standards have been accompanied by patent pools – arrangements to license multiple patentholders’ relevant intellectual property as a package. A key distinction made by regulators – between patents essential to a standard and patents with substitutes – has not been addressed in the theoretical literature. I show that pools of essential patents are always welfare-positive, while pools which include nonessential patents can be welfare-negative – even pools which are limited to complementary patents and are stable under compulsory individual licensing. If pools gain commitment power and price as Stackelberg leaders, this reduces, and can even reverse, the gains from welfare-increasing pools.