Pool Formation with Three Patent Owners

We analyze the endogenous formation of patent pools among three patent owners and the associated welfare effects. Under a condition of synergistic three-patent combination, either a unique symmetric equilibrium or infinitely many asymmetric equilibria can arise when patents are fragmented. By using the notion of equilibrium binding agreements, we show that (1) when there is a unique symmetric equilibrium under fragmented patents, the complete pool is both stable and welfare-maximizing; (2) fragmented patents are stable in the presence of infinitely many asymmetric equilibria; and (3) when considering only a single specific asymmetric equilibrium under fragmented patents, the complete pool is welfare-maximizing if it is stable, while fragmented patents can be both stable and welfare-maximizing under certain conditions. We also discuss an alternative version of synergism and an alternative bargaining protocol for patent pool formation.