Patents and pools in pyramidal innovation structures

We study sequential innovation in two pyramidal structures, in which patent pools are socially desirable. Patent pools are stable, in a regular pyramid structure but not in an inverse pyramid structure under a standard pool formation process. We propose a more elaborate formation protocol that allows for the creation and stability of the largest possible pool. We also examine the welfare implications of introducing patent protection in both structures. Patent protection increases the likelihood of innovation as the pyramid becomes wider in the regular pyramid structure while patent protection always decreases the likelihood of innovation in the inverse pyramid structure.