Patent Pool as a Preemptive Action Against Patent Trolls

This study explores whether a patent pool plays a positive role in reducing the activity of patent trolls—who sue firms of all sizes amid the threats of complex technology litigation—by using a game theory framework based on a vertical differentiation model. We find that when both firms develop core technologies of similar quality, price competition arises, leading to a decrease in product prices. However, if there is a significant gap in technology quality between the firms, pooling results in higher prices. Additionally, we examine how the difference in quality affects the profits of the two companies. As the quality gap widens, the combined profit of the two firms initially decreases until it reaches a certain cutoff point, beyond which their profits begin to increase. We then identify the region where the pooling strategy becomes a unique Subgame Perfect Nash Equilibrium (SPNE) when the technologies overlap to an appropriate degree. The incentive for pooling is greatest when the technology overlap is moderate, and it decreases as the level of technology overlap increases. Furthermore, we conduct a social welfare analysis and find that while the presence of patent trolls generally has a positive effect on social welfare, it negatively impacts welfare at higher levels of technology quality.