Patents and Pools in Pyramidal Innovation Structures

We study sequential innovation in two pyramidal structures. In both, patent pools are socially desirable. In a regular pyramid, patent pools are stable. In an inverse pyramid, patent pools are not stable when following a standard formation process. We offer a more elaborate formation protocol that allows for the creation and stability of the largest pool possible. We also examine welfare implications of patent protection in both structures. In the regular pyramid, as it expands, patent protection increases the likelihood of innovation. In the inverse pyramid patent protection always decreases the likelihood of innovation.