Patent Pools and Innovation in Substitutes - Evidence from the 19th Century Sewing Machine Industry

Patent pools, which combine complementary patents of competing firms, are expected to increase overall welfare – but potentially discourage innovation in substitutes for the pool technology. This paper exploits a new historical data set on changes in patenting and firm entry for a clearly defined pool technology and substitutes in the 19th century sewing machine industry to investigate the effects of a pool on innovation in substitutes. This analysis reveals a substantial increase in innovation for an – albeit technologically inferior – substitute technology. Historical evidence suggests that the creation of a pool diverted innovation towards an inferior substitute by creating differential license fees and litigation risks, which made it more difficult for outside firms to compete directly with the pool technology