Increasing returns and path dependence in knowledge creation and their effects on the dynamics of patent pools

This paper analyzes pro-competitive patent pools using basic premises of knowledge creation and their reflections for modern patent pools in the presence of intellectual property rights (IPR). We argue that cumulativeness and combinatorial nature of knowledge production correspond to path dependence and increasing returns in the realm of the knowledge economy. This correspondence allows us to model dynamics of modern patent pools using nonlinear Polya urns. We show that increasing the number of firms contributing to a patent pool of complementary patents or increasing the rate of having infringing patents favor the contributing firms’ coexistence chance. On the other hand, increasing these parameters negatively affects the non-contributing firm’s relative number of patents. In particular, the probability that the frequency of the latter firm’s patents vanishes asymptotically increases as these parameters grow. As a result, we conclude that the probability that the market will be dominated by the firms contributing to pro-competitive patent pool increases as the pool enlarges.