Combining Inventions in Multi-Invention Products : Organizational Choices, Patents, and Public Policy

We investigate the implications for patent-related public policy arising out of products that incorporate large numbers of inventions. Inventions may be combined in such multi-invention products using three alternative organizational modes - viz., licensing of inventions, trade in components that embody inventions, or by integrated production. An analytical framework is presented wherein the organizational tradeoffs between these modes are evaluated using a transaction cost approach. We demonstrate that patent policy not only affects incentives for innovation, but also influences these transaction costs, which in turn determine the preferred organizational mode(s) in the industry. Therefore, appropriate patent policy for multi-invention products is determined not only by tradeoffs between incentives for innovation and the ill-effects of monopoly, but also by organizational considerations in commercialization. The framework operationalizes the concerns voiced in many industries that current patent policy gives rise to dysfunctional transaction costs in multi-invention contexts. Implications are drawn for patent policy based on the framework and transaction cost analyses