Pooling with Essential and Nonessential Patents

Several recent technological standards were accompanied by patent pools?arrangements to license 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 increasing, while pools which include nonessential patents can be welfare reducing?even pools limited to complementary patents and stable under compulsory individual licensing. If pools gain commitment power and price as Stackelberg leaders, this reduces, and can reverse, the gains from welfare increasing pools.