!

Three!Essays!on!Network!Analysis!and!Patent!Citation!Networks!!!By!!

Galen!Russell!Hancock!!!

A!dissertation!submitted!in!partial!satisfaction!of!the!!

requirements!for!the!degree!of!!

Doctor!of!Philosophy!!in!!

Economics!!

in!the!!

Graduate!Division!!

of!the!!

University!of!California,!Berkeley!!!

Committee!in!charge:!!

Professor!Bronwyn!H.!Hall,!Chair!Professor!Richard!J.!Gilbert!Professor!Robert!P.!Merges!

!! !Fall!2013!

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! 1!

Abstract!!

Three!Essays!on!Network!Analysis!and!Patent!Citation!Networks!!by!!

Galen!Russell!Hancock!!

Doctor!of!Philosophy!in!Economics!!

University!of!California,!Berkeley!!

Patent!statistics!provide!insight!into!a!range!of!economic!phenomena!in!the!economics!of!innovation.!Since!the!earliest!research!using!patent!data,!it!was!recognized!that!patents!are!highly!heterogeneous!with!a!minority!of!patents!having!much!greater!impact!and!value!than!others.!Citation!counts!are!a!key!measurement!of!patents,!observable!directly!from!patent!bibliographic!data,!which!carries!information!about!patent!characteristics.!But!patent!citations!form!a!complex!network!that!carries!more!information!about!patents!than!the!number!of!a!patent’s!immediate!neighbors.!!This!dissertation!explores!network!measures!that!exploit!this!structure!to!extract!more!information!about!patents.!The!first!chapter!of!this!dissertation!is!addressed!to!network!centrality!and!the!measurement!of!patent!value.!The!centrality!of!a!patent!is!negatively!related,!after!controls!for!citation!counts,!to!public!company!market!value.!This!establishes!that!centrality!measurements!carry!information!about!patent!attributes!beyond!citation!counts,!and!suggests!a!clear!market!saturation!phenomenon!that!may!drive!the!result.!!The!next!chapter!considers!whether!patent!centrality!measurements!can!detect!probable!holdup!in!the!economic!space!of!patents.!Patent!pools!associated!with!technical!standards,!such!as!the!MPEGS2!video!compression!method,!can!relate!to!inventions!subject!to!many!competing!rights.!Centrality!measurements!are!lower!for!patents!that!are!in!the!patent!pool,!suggesting!a!line!of!research!into!the!measurement!of!patent!complementarity!and!substitute!relationships.!!The!remaining!chapter!concerns!technology!identification!from!patent!citations.!Classifying!patents!by!technology!is!a!common!necessity!in!patent!empirics,!and!existing!approaches!using!administrative!classification!suffer!certain!inevitable!limitations!due!to!the!nature!of!the!classification!system.!Community!detection!algorithms!can!use!citations!to!break!patents!into!natural!groups.!An!empirical!analysis!shows!that!the!communities!thus!produced!contain!more!information!than!administrative!classifications!and!can!detect!underlying!technological!changes!before!the!classification!system!does.!

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Table&of&Contents&

1! Introduction+.......................................................................................................................+1!2! Patent+Citation+Networks+as+a+Window+on+Patent+Value+.....................................+2!2.1! Introduction+.............................................................................................................................+2!2.2! Background+and+prior+literature+......................................................................................+4!2.2.1! Patent!citations!and!their!uses!...................................................................................................!4!2.2.2! Patent!policy!questions!.................................................................................................................!6!2.2.3! Patent!citation!networks!...............................................................................................................!9!

2.3! Networks+overview+.............................................................................................................+10!2.4! Analysis+...................................................................................................................................+12!2.4.1! Patent!portfolios,!market!saturation,!and!value!..............................................................!13!2.4.2! Citation!generation!and!saturation!.......................................................................................!15!2.4.3! Simulation!of!citation!generation!...........................................................................................!17!

2.5! Data+and+results+...................................................................................................................+18!2.5.1! Centrality!measurement!and!descriptive!statistics!........................................................!19!2.5.2! Market!saturation,!basicness,!and!value!.............................................................................!22!

2.6! Conclusion+..............................................................................................................................+23!3! Network+Analysis+and+Patent+Pools+.........................................................................+24!3.1! Introduction+..........................................................................................................................+24!3.2! Background+and+prior+literature+...................................................................................+24!3.3! Analysis+...................................................................................................................................+29!3.3.1! Pools!and!betweenness!centrality!.........................................................................................!29!3.3.2! Pools!and!saturation!....................................................................................................................!35!

3.4! Data+and+results+...................................................................................................................+36!3.4.1! Patent!pools!and!creating!comparison!sets!.......................................................................!36!3.4.2! Measures!and!descriptive!results!..........................................................................................!37!3.4.3! Empirical!analysis!.........................................................................................................................!37!3.4.4! The!PRK!pool!...................................................................................................................................!39!

3.5! Conclusion+..............................................................................................................................+39!4! Community+Detection,+Patent+Classification,+and+Patent+Portfolio+Concentration+........................................................................................................................+40!4.1! Introduction+..........................................................................................................................+40!4.2! Background+and+prior+literature+...................................................................................+41!4.2.1! Patent!classification!.....................................................................................................................!41!4.2.2! Applications!of!patent!classification!.....................................................................................!43!4.2.3! R&D!and!concentration!..............................................................................................................!44!

4.3! Patent+citations+and+communities+.................................................................................+44!4.3.1! Clustering!related!patents!into!groups!................................................................................!45!4.3.2! Classes!compared!to!communities!........................................................................................!48!4.3.3! Returns!to!concentration!...........................................................................................................!51!

4.4! Data+and+results+...................................................................................................................+52!4.4.1! Descriptive!results!........................................................................................................................!52!4.4.2! Reclassification!and!nanotechnology!...................................................................................!53!4.4.3! Returns!to!concentration!...........................................................................................................!53!

4.5! Conclusion+..............................................................................................................................+54!

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5! Conclusion+........................................................................................................................+55!6! References+........................................................................................................................+56!7! Tables+and+Figures+........................................................................................................+62!!!

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1 Introduction&In!the!use!of!patent!statistics!for!economic!analysis,!citations!have!been!a!key!

and!valuable!tool!in!understanding!the!economic!significance!of!patents.!Past!papers!have!applied!patent!data!to!detecting!which!detecting!knowledge!flows!between!inventors,!judging!which!inventions!are!more!basic!or!original,!and!estimating!the!market!value!of!patents.!Meanwhile,!fundamental!questions!involve!the!impact!of!patenting!on!incentives!to!innovate,!the!nature!of!the!function!that!patents!perform!in!large!portfolios,!and!economic!holdup!problems!resulting!from!blocking!patent!rights.!

The!nature!of!these!questions!makes!interrelationships!between!patents!a!fundamental!object!of!inquiry.!The!holdup!potential!that!exists!when!multiple!patents!are!necessary!to!manufacture!a!single!product!is!fundamentally!about!the!relationships!between!those!patents.!When!judging!which!patents!are!more!similar!or!more!different!from!one!another,!one!is!making!a!judgment!about!the!relationships!between!the!patents.!Broadly!speaking,!the!economic!significance!of!a!patent!is!fundamentally!dependent!on!its!ties!to!other!patents.!

Patent!citations!are!a!key!source!of!data!about!these!relationships,!and!form!a!large!complex!structure!spanning!the!space!of!patents.!Much!of!the!information!accessible!from!the!structure!is!unexploited,!and!can!be!extracted!from!the!citation!structure!using!network!analytic!tools.!

Network!science!or!social!network!analysis!encompasses!a!broad!range!of!tools,!many!of!which!are!difficult!to!apply!directly!in!empirical!economic!work.!A!typical!problem!in!economics!requires!analysis!at!the!patent!level,!assigning!a!characteristic!to!each!patent!based!on!its!position!within!the!citation!network.!Two!tools!that!can!accomplish!this—assigning!a!statistic!to!each!element!within!a!network,!rather!than!computing!values!for!the!network!as!a!whole—are!centrality!measurements!and!community!detection.!Centrality!measurements!measure!the!location!of!a!node!within!a!network,!and!community!detection!divides!a!network!into!logical!subgroups.!

Centrality!measurements!can!identify!forms!of!importance!or!positional!relationship!within!a!network.!It!is!a!logical!tool!for!analyzing!patent!value,!which!can!be!studied!empirically!with!tools!from!the!literature.!The!following!chapter!pursues!this!analysis.!Centrality!has!a!twofold!effect:!it!picks!up!importance!or!value,!and!also!a!market!saturation!effect!that!inhibits!value.!

The!following!chapter!examines!the!centrality!of!patents!in!a!standards!patent!pool.!Patent!pools!are!arrangements!that!may!have!positive!or!negative!effects!on!competition,!depending!on!the!relationships!between!patents!within!them;!those!associated!with!standards!pools!are!likely!to!contain!patents!that!are!economic!complements.!Centrality!can!distinguish!these!patents!from!nonSpool!patents,!and!is!a!first!step!towards!seeking!evidence!of!substitute!and!complementary!relationships!between!patents!from!patent!data.!

Community!detection,!by!nature,!produces!results!that!take!the!global!nature!of!the!patent!network!into!account.!By!dividing!the!patent!network!into!natural!

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pieces,!it!forms!a!natural!way!to!identify!technological!groups.!The!remaining!chapter!involves!a!question!that!arises!in!almost!every!patent!analysis!that!spans!multiple!technologies,!which!is!how!a!researcher!should!identify!and!control!for!technological!differences.!Community!detection!is!a!promising!tool!for!identifying!technological!groups!with!an!objective!and!citationSdriven!methodology!that!avoids!biases!inherent!in!existing!classification!systems.!

2 Patent&Citation&Networks&as&a&Window&on&Patent&Value&

2.1 Introduction&This!chapter!examines!the!meaning!of!patent!citations!with!a!set!of!tools!

developed!for!analyzing!the!structure!of!networks!in!other!areas.!Patent!citations!have!been!used!extensively!in!the!economic!patent!literature!and!have!been!shown,!among!other!applications,!to!be!strongly!predictive!of!patent!value.!There!is!a!deeper!structure!of!the!citation!network!that!has!not!been!systematically!examined.!In!essence,!the!past!literature!focuses!on!the!number!of!patent!citations!immediately!adjacent!to!a!patent!of!interest!without!considering!the!collection!of!citations!as!a!whole,!or!taking!into!account!that!the!citing!or!cited!patents!themselves!have!different!values.!I!describe!and!test!tools!for!performing!this!type!of!analysis,!using!tools!originally!developed!for!analyzing!other!kinds!of!networks,!such!as!social!networks!and!networks!that!describe!the!physical!properties!of!objects.!Patent!citation!networks!reveal!substantial!information!about!patent!value!and!patent!subject!matter!not!previously!discovered!from!raw!citation!counts.!This!work!advances!on!several!past!results,!including!work!using!market!value!analysis!and!citations!to!study!the!value!of!patents!(Hall,!Jaffe,!&!Trajtenberg,!2005),!network!science!tools!from!social!network!analysis!(Wasserman!&!Faust,!1994),!and!past!insights!into!the!significance!of!network!theory!for!patents!(BarberáSTomás,!JiménezSSáez,!&!CastellóSMolina,!2011;!Belenzon,!2006;!Strandburg,!Csardi,!Tobochnik,!&!Erdi,!2006;!Valverde,!Solé,!Bedau,!&!Packard,!2007).!

Patent!citations!have!been!used!extensively!in!the!literature,!as!described!more!fully!below,!and!are!closely!related!to!patent!value!and!other!phenomena.!A!cited!patent!is!more!likely!to!be!litigated,!more!likely!to!be!renewed,!and!is!associated!with!corporate!value!in!market!value!studies.!SelfScitations!(a!citation!by!a!company!to!its!own!patent)!are!also!associated!with!value!at!certain!sizes.!Citations!are!also!related!to!continuation!practice!and!foreign!patenting,!which!themselves!are!indications!of!value.!

However,!with!relatively!few!exceptions!patent!citations!have!been!used!in!a!very!specific!way!that!does!not!make!maximum!use!of!the!information!about!the!interrelationships!and!positional!value!of!patents!that!is!inherent!in!the!citation!network.!This!information!is!highly!relevant!to!topics!addressed!in!the!legal!and!public!policy!patent!literature,!such!as!patent!thickets,!their!implications!for!standardsSsetting,!recent!major!patent!cases,!questions!about!the!impact!of!patents!in!the!IT!sector,!and!the!growth!in!extremely!large!patent!portfolios.!

Specifically,!researchers!commonly!use!patent!data!by!obtaining!bibliographic!data!about!the!patent!and!its!immediate!neighbors!(citing!and!cited!

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patents)!and!constructing!relevant!variables!for!a!statistical!analysis!from!those!data!only.!While!this!method!has!lead!to!great!success,!it!clearly!only!uses!a!portion!of!the!information!available!about!a!given!patent.!Much!more!information!is!inherent!in!the!structure!of!the!citation!network!near!to!the!patent.!For!example,!if!many!of!the!adjacent!patents!cite!to!each!other!then!one!might!infer!a!closer!relationship!between!them.!This!might!lead!one!to!weight!their!citations!to!the!patent!of!interest!more!heavily!(or!less!heavily),!depending!on!what!one!thinks!the!underlying!significance!of!a!citation!is.!

But!there!are!many!ways!in!which!one!can!add!up!nearby!citations,!and!the!branching!structure!of!the!overall!citation!network!lends!itself!to!specialized!tools.!To!efficiently!test!aspects!of!the!citation!network!and!find!economically!relevant!features,!it!is!helpful!to!turn!to!preexisting!tools!in!the!network!science!literature!that!have!been!developed!for!this!purpose,!and!that!produce!summary!variables!describing!a!particular!patent!or!regions!of!a!citation!network.!

This!chapter!focuses!on!two!measurements!in!particular:!PageRank!and!betweenness!centrality.!PageRank!is!a!generalization!of!raw!citation!counts!that!gives!more!weight!to!patents!that!are!themselves!more!heavily!cited.!This!enables!a!measure!of!“importance”!of!a!patent!within!the!overall!citation!network.!The!betweenness!centrality!of!a!patent!is!a!measurement!of!how!many!shortest!paths!between!patents!a!patent!of!interest!is!on.1!I!examine!what!information!they!carry!about!patents!and!how!they!are!distributed!qualitatively.!

The!key!question!in!this!chapter!is!whether!the!measurements!improve!the!measurement!of!patent!value,!as!measured!through!their!impact!on!public!company!market!value.!I!show!that!they!do,!but!not!in!the!way!one!might!expect.!Intuitively,!since!citations!are!known!from!past!work!to!indicate!value,!it!may!seem!that!citations!from!moreSheavilyScited!patents!should!indicate!more!value,!and!that!therefore!patents!with!higher!PageRank!should!have!more!value.!A!similar!intuition!might!apply!for!betweenness.!In!fact,!after!controls,!both!are!related!to!lower!value.!I!interpret!this!as!an!indication!of!oversaturation!in!the!space!of!patent!rights!with!a!network!model!that!implicitly!describes!a!citationSgenerating!process.!This!oversaturation!effect!may!quantitatively!measure!patent!characteristics!that!have!been!previously!raised!in!the!patent!policy!literature,!such!as!anticommons!and!patent!thicket!effects.!

In!the!following!section,!I!describe!the!prior!literature!and!some!relevant!policy!questions!that!motivate!investigation!into!patent!citations.!The!next!section!describes!the!relevant!background!concepts!from!the!network!science!literature.!I!then!describe!a!simple!model!of!patent!citation!formation!and!hypotheses!it!implies.!The!following!section!gives!empirical!results.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1!The!term!“centrality,”!by!itself,!is!a!generic!term!in!network!science!for!how!central!an!object!is!in!a!network.!Both!PageRank!and!betweenness!are!particular!examples!of!centrality!measurements,!and!there!are!others.!

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2.2 Background&and&prior&literature&

2.2.1 Patent&citations&and&their&uses&Patent!data!has!been!used!as!a!measurement!of!economic!inventive!output!

since!work!by!Schmookler!(1966)!on!the!causes!of!technological!innovation.!Many!early!studies!with!patent!statistics!used!raw!patent!counts!as!the!measurement!of!innovation,!which!have!the!limitation!that!they!do!not!take!into!account!the!substantial!differences!in!value!between!patents.!As!a!paper!by!Scherer!observed!(1965),!

Fragmentary!data!on!the!profitability!of!patents—one!indicator!of!economic!significance—reveal!a!distribution!highly!skewed!toward!the!low!private!value!side,!with!a!very!long!tail!into!the!high!value!side.!...![O]ne!cannot!be!sure!that!the!mean!economic!value!of!any!particular!sample!of!patents!converges....!This!forces!us!to!acknowledge!that!patent!statistics!are!likely!to!measure!runSofStheSmill!industrial!inventive!output!much!more!accurately!than!they!reflect!the!occasional!strategic!inventions!which!open!up!new!markets!and!new!technologies.!The!latter!must!probably!remain!the!domain!of!economic!historians.!

Later!studies!noted!this!also.!Griliches,!Hall,!and!Pakes!(1991),!for!example,!attempted!to!identify!technological!opportunity!shocks!in!market!value!and!patent!data.!Patents!turned!out!to!be!very!noisy!indicators!of!underlying!economic!invention!value,!in!part!because!of!their!highly!skewed!value!distribution.!

The!first!effort!to!use!patent!citation!data!to!examine!the!substantial!differences!in!value!between!patents!came!from!Trajtenberg!(1990)!using!citations!in!the!context!of!computed!tomography!scanners.!Trajtenberg!noted!that!patent!citations!were!legally!significant,!because!of!their!role!in!delimiting!the!granted!property!right,!and!that!the!legal!process!of!generating!a!patent!appeared!to!incentivize!citing!the!relevant!prior!patents!and!not!others.!

Trajtenberg!showed!a!significant!relationship!between!patent!citations!and!the!economic!value!of!patents!relevant!to!CT!scanners.!There!was!also!a!substantial!relationship!between!R&D!spending!and!raw!patent!counts.!This!can!be!thought!of!as!showing!the!inputs!and!outputs!to!the!innovation!process:!generating!a!new!patented!invention!costs!a!certain,!roughly!fixed!(in!a!given!technology,!for!a!given!firm)!amount!of!effort.!After!some!time!passes,!the!true!ex!post!value!of!the!innovation,!indicated!in!part!by!citations,!is!revealed.!In!addition,!Trajtenberg!found!the!value!indicated!by!a!citation!grew!somewhat!faster!than!linearly!in!the!number!of!citations.!This!indicated!that!the!value!of!patents!were!more!skewed!than!the!citation!count!distribution!would!indicate.!

In!addition!to!indicating!patent!importance,!citations!have!been!used!as!indications!of!technological!knowledge!spillovers.!Jaffe!(1986)!investigated!how!a!firm’s!patenting,!profits,!and!market!value!were!affected!by!R&D!performed!by!other!firms!in!the!same!technological!area.!Such!spillovers!improved!the!market!outcomes!of!firms!that!had!significant!R&D!spending!of!their!own,!but!did!not!improve!outcomes!independently!of!such!spending.!

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A!related!subject!is!basicness!of!patents.!Basicness!was!studied!by!Trajtenberg,!Henderson,!and!Jaffe!(1997),!who!attempted!to!identify!measurements!of!the!nature!of!particular!inventions!that!indicated!how!basic!or!appropriable!they!were.!Their!method!was!based!on!the!idea!that!citations!indicated!ancestor!or!descendent!inventions.!For!example,!an!index!of!“importance,”!meant!to!measure!a!form!of!basicness,!was!based!on!citations!from!later!patents,!with!these!citations!themselves!weighted!by!importance!(and!with!a!discount!factor!to!cause!the!contribution!of!patents!distant!in!the!chain!to!drop!off).!An!index!of!“generality”!was!based!on!the!Herfindahl!index!of!citations!from!different!patent!classes.!To!measure!appropriability,!they!used!the!share!of!citations!coming!from!patents!awarded!to!the!same!inventor.!They!tested!these!metrics!by!comparing!university!and!corporate!patents,!and!found!that!university!patents!were!more!basic!and!less!appropriable!than!corporate!patents.!

Lanjouw!and!Schankerman!(2004)!also!attempted!to!construct!patent!measurements,!but!restricted!their!attention!to!the!number!of!claims!in!the!patent,!the!number!of!citations!received!and!made!by!the!patent,!and!the!number!of!other!patents!in!the!international!patent!system!that!are!in!the!same!family!(essentially,!that!correspond!to!the!same!invention).!They!identified!patent!quality!as!the!common!factor!influencing!all!four!of!these!factors!in!a!multipleSindicator!model.!With!this!assumption,!citations!received!and!number!of!claims!were!the!most!significant!factors!indicating!patent!quality!for!pharmaceutical!patents,!and!in!other!patents!claims!were!more!important!and!citations!made!the!next!most!important.!The!use!of!multiple!indicators!of!quality!substantially!reduced!the!observed!variance!in!patent!quality.!

Hall,!Jaffe,!and!Trajtenberg!(2005)!used!an!extensive!data!set!of!patents!from!1963–1999!and!a!matching!data!set!between!them!and!Compustat!listed!firms!to!investigate!the!connection!between!patent!citations!and!market!value.!CitationSweighted!patent!stocks,!measured!by!counting!patents!in!the!patent!data!set!and!discounting!their!sum!with!a!15%!depreciation!rate,!proved!to!be!associated!with!market!value,!as!measured!by!Tobin’s!q!(the!marketStoSbook!ratio).!Citation!stocks!did!not!correlate!with!market!value!as!well!as!R&D!did,!but!added!information!about!value!beyond!R&D!spending.!Citations!made!after!a!given!point!in!time!contained!some!information!about!that!time’s!market!value,!indicating!future!citations!contained!some!information!presently!available!to!investors.!The!paper!also!discussed!strategies!for!addressing!truncation!issues!inherent!in!this!area.!

Sampat!and!Ziedonis!(2005)!also!considered!the!extent!to!which!patent!citation!counts!predict!private!value,!using!university!licensing!data!to!estimate!the!private!value!of!a!patent.!Licensing!data!from!universities!provides!a!different!means!of!estimating!the!economic!value!of!a!patent!from!using!firms’!market!capitalization!as!evidence,!and!gives!more!direct!information!because!the!licensing!data!is!associated!with!specific!patents.!They!found!that!citations!were!predictive!of!whether!an!invention!was!licensed!but!not!of!its!revenue!after!licensing,!and!theorized!that!this!supports!the!view!that!citations!indicate!market!interest!in!technological!areas!close!to!cited!patents,!but!not!necessarily!something!more!direct,!like!the!amount!of!returns!the!patent!was!capable!of!appropriating.!

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2.2.2 Patent&policy&questions&In!parallel!with!these!lines!of!research,!commenters!raised!questions!about!

how!well!the!patent!system!operated!in!practice!to!fulfill!its!mission!of!promoting!the!progress!of!science,!particularly!in!the!IT!sector.!In!recent!decades,!patents!have!grown!in!strategic!importance!in!the!form!of!large!portfolios!held!by!major!companies.!While!patents!always!formed!a!part!of!the!defensive!strategy!of!large!companies,!they!previously!had!a!greater!tendency!to!work!in!isolation,!compared!to!a!more!modern!tendency!towards!significant!stockpiles!by!the!largest!firms!and!occasional!major!lawsuits.!

The!patent!system!exists!to!promote!the!progress!of!science!through!grants!of!monopolies!to!inventors.!This!policy!exists!in!tension!with!other!policies,!such!as!antitrust!laws!created!to!prevent!anticompetitive!conduct.!This!raises!questions!about!the!ideal!extent!of!protection!(through!remedies!for!infringement,!the!scope!of!what!patents!cover,!fees!for!patents,!and!patent!term!length),!and!about!whether!patents!are!properly!used!to!attempt!to!obtain!monopolistic!advantage!beyond!their!term!or!control!over!other!related!patents.!

Patents!have!risen!as!a!tool!for!legal!attacks!between!large!competitors,!with!patenting!growing!as!a!result!in!recent!decades.!In!major!high!technology!companies,!patents!were!long!a!significant!asset,!which!many!firms!tended!to!stockpile!them!rather!than!act.!But!more!recently!patent!suits!have!occurred,!for!example,!between!Intel!and!AMD,!Apple!and!Samsung,!and!Facebook!and!Yahoo.!These!occurred!as!continuing!improvements!in!technology!resulted!in!major!shifts!in!which!companies!dominated!technologySrelated!revenue!from!consumers;!while!the!companies!of!a!previous!antitrust!suit,!Netscape!and!Microsoft,!faded!in!significance,!Apple,!Google,!and!Amazon!became!more!significant.!

In!this!context!of!upheaval,!patents!have!suddenly!gained!importance!as!a!means!for!a!company!to!maintain!a!competitive!advantage.!Several!recent!patent!sales!have!involved!sixSfigure!valuations!on!average!for!patent!portfolios.!For!instance,!a!recent!bankruptcy!auction!of!patents!held!by!Nortel!fetched!high!prices!and!interest!from!major!companies,!the!recent!acquisition!of!Motorola!by!Google!appears!motivated!substantially!by!patents,!and!in!a!recent!major!transaction!Facebook!acquired!patents!from!AOL,!later!reselling!them!to!Microsoft.!In!each!of!these!deals,!the!patents!involved!averaged!sums!in!the!low!six!figures!or!higher!(Lohr,!2012).!This!is!quite!large,!given!that!the!average!patent!directly!produces!very!little!value!for!its!owner!(Moore,!2005).!

There!are!several!possible!explanations!for!these!high!secondary!market!valuations.!Industry!norms!may!have!shifted!from!a!mutuallySassuredSdestruction!equilibrium!to!actual!assertion!of!patents!between!major!competitors,!requiring!greater!acquisition!of!patents.!Another!possibility!is!that!technological!changes!have!lead!to!greater!problems!of!blocking!or!highly!complementary!patents.!One!possibility!is!simply!speed:!when!new!products!are!developed!in!rapid!succession,!and!one!product!leans!on!a!predecessor’s!technology,!the!standard!patent!term!of!twenty!years!may!be!larger!than!efficient.!The!analogy!here!is!to!look!at!the!system!of!the!past:!when!technologies!developed!one!after!another,!gradually,!one!would!fall!into!the!public!domain!and!a!later!technology!could!reuse!it.!When!technology!changes!faster!and!terms!remain!the!same,!that!cannot!occur.!

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These!changes!were!preceded!both!by!technological!changes!and!by!a!changing!approach!to!patent!law.!A!major!change!in!the!landscape!of!patent!law!came!in!1982!with!the!creation!of!the!U.S.!Court!of!Appeals!for!the!Federal!Circuit,!which!centralized!patent!appellate!law!in!a!single!court.!The!new!court!lead!substantial!legal!changes!over!time,!including!a!growth!in!subject!matter!protection!to!cover!business!method!patents,!a!change!in!the!treatment!of!claim!construction,!making!it!a!matter!for!courts!rather!than!juries,!and!a!growth!in!the!ability!of!patentees!to!obtain!injunctive!relief.!

At!the!same!time,!the!approach!of!antitrust!law!towards!patents!changed.!In!an!earlier!era,!the!executive!branch!and!the!Supreme!Court!took!a!narrower!view!of!patent!protection,!treating!it!as!an!exception!to!the!general!rule!of!competition!to!be!applied!narrowly.!In!the!1940s!and!1950s,!the!government!obtained!orders!requiring!compulsory!licensing!of!patents!between!firms,!in!order!to!limit!the!impact!of!very!large!patent!portfolios,!with!some!of!these!licenses!at!zero!cost.!For!instance,!in!the!1945!case!Hartford(Empire.Co..v..United.States,!the!Supreme!Court!upheld!in!part!an!antitrust!decision!against!an!owner!of!glass!manufacturing!patents!that!required!licensing!on!a!uniform!royalty!scheme!without!restrictive!covenants,!and!in!the!1963!case!United.States.v..Singer.Manufacturing.Co.!it!reversed!the!dismissal!of!a!suit!by!the!government!alleging!that!concerted!action!by!several!patent!holders!aimed!at!preventing!market!entry!by!foreign!manufacturers!was!anticompetitive!(Gilbert,!2004).!

The!growth!in!patenting!and!the!changes!in!patent!policy!lead!to!research!into!whether!the!connection!between!them.!For!instance,!Hall!and!Ziedonis!(2001)!found!based!on!interviews!that!semiconductor!industry!professionals!thought!management!of!the!R&D!process!had!not!undergone!a!major!change,!but!that!intellectual!property!management!had!changed!significantly,!leading!to!more!patenting.!Interviewees!also!indicated!the!introduction!of!the!Federal!Circuit!changed!incentives!substantially,!in!some!cases!leading!to!the!legal!threshold!for!nonobviousness!being!too!low!and!too!many!patents!being!issued!(although!statistics!did!not!confirm!that!patent!quality!had!significantly!decreased).!In!addition,!Hall!and!Ziedonis!noted!a!strategic!dynamic!in!which!firms!raced!to!obtain!as!many!patents!as!possible,!in!order!to!accumulate!patents!to!use!in!bargaining!with!other!firms!over!patent!disputes.!

This!strategic!dynamic!appeared!to!occur!in!part!because!of!the!shift!in!the!legal!standard!for!injunctive!relief!in!patent!standards.!The!Federal!Circuit!adopted!a!rule!that!patents!would!regularly!be!protected!with!injunctions!against!infringement,!not!merely!royalty!payments,!which!could!lead!to!very!substantial!costs!for!manufacturing!firms!that!had!already!committed!to!a!particular!technology.!This!effect!is!particularly!important!in!complex!rather!than!discrete!technologies—technologies!like!computer!systems!and!electronics!where!products!involve!many!different!parts!with!independently!patentable!components,!rather!than!technologies!like!chemicals!that!tend!to!involve!one!or!a!few!patented!inventions!at!a!time.!In!these!technologies,!numerous!patents!can!each!provide!an!effective!veto!over!the!creation!of!a!product,!and!a!justification!for!royalties.!

A!related!cause!of!patent!buildup!can!be!the!standard!to!obtain!a!patent.!As!Bessen!(2003)!described,!when!patent!standards!are!low,!many!firms!may!control!

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different!patents!that!are!all!necessary!to!assemble!a!product.!This!leads!incumbent!firms!to!apply!for!many!patents,!in!order!to!have!a!large!stack!of!patents!for!crossSlicensing!deals.!These!firms!manage!their!patent!portfolios!in!the!aggregate,!and!often!make!deals!over!their!entire!portfolios,!rather!than!over!particular!patents.!Large!patent!portfolios!can!have!significant!effects,!such!as!making!it!difficult!for!new!entrants!to!join!markets,!or!granting!a!large!incumbent!freedom!through!crossSlicensing!to!engage!in!many!different!businesses.!

The!theory!that!the!Federal!Circuit!was!the!cause!of!these!changes!was!not!universally!held.!In!another!study!of!the!growth!in!patenting,!Kortum!and!Lerner!(1999)!investigated!the!rise!of!patenting!over!recent!decades,!exploring!several!hypotheses:!that!the!creation!of!the!U.S.!Court!of!Appeals!for!the!Federal!Circuit!in!1982!resulted!in!a!proSpatent!change!in!the!legal!environment,!tilting!innovator!incentives!towards!increased!patenting;!that!technological!opportunities!changed,!either!because!new!sciences!arose!with!more!fertile!ground!for!innovation,!the!process!of!invention!improved!because!of!information!technology,!or!research!and!development!management!practices!changed;!or!that!regulatory!capture!occured!over!the!Federal!Circuit,!the!USPTO,!or!congressional!patent!policy.!Of!these,!they!suggested!management!changes!were!the!likely!candidate,!as!their!empirical!evidence!cast!doubt!on!the!others.!

Regardless!of!the!direct!cause!of!growth!of!patenting,!holdup!problems!can!arise!from!heavy!patenting.!In!the!legal!literature!these!have!been!called!anticommons!problems.!By!analogy!to!the!tragedy!of!the!commons,!where!there!are!too!few!property!rights,!anticommons!cases!occur!where!overly!extensive!exclusive!rights!lead!to!underexploitation!of!an!economic!resource.!Anticommons!problems!may!affect!industries!where!patents!densely!cover!a!technological!area,!preventing!anyone!from!being!able!to!practice!an!invention!with!a!deal!with!a!single!entity!(Heller,!1998).!This!problem!is!equivalent!to!monopoly!over!complementary!goods,!which!is!known!to!lead!to!worse!results!than!simple!monopoly.!Ziedonis!(2004)!investigated!these!hypotheses!in!the!semiconductor!industry,!testing!them!with!a!citationSbased!index!of!exclusive!rights!fragmentation,!and!found!evidence!that!portfolio!races!were!caused!by!capitalSintensive!firms!patenting!aggressively!in!response!to!fragmentation!in!outside!patent!holdings.!

At!the!same!time,!the!relevance!of!patents!to!their!traditional!objective!of!encouraging!has!been!questioned.!A!2008!Berkeley!study!(Graham,!Merges,!Samuelson,!&!Sichelman,!2009;!Graham!&!Sichelman,!2010),!for!instance,!surveyed!highStechnology!entrepreneurs,!finding!that!many!(although!not!all)!were!not!induced!to!invent!by!the!patent!system,!but!used!it!in!other!ways!such!as!to!more!easily!obtain!funding!or!secure!competitive!advantages!in!the!marketplace.!This!is!consistent!with!remarks!by!other!commenters,!who!have!noted!that!intellectual!property!can!be!used!to!assist!in!enforcing!other!bargains,!such!as!business!partnerships!and!investments.!Merges!(2005),!for!instance,!described!the!value!of!intellectual!property!rights!in!contractual!negotiations,!enabling!parties!to!disclose!information!in!negotiations!they!might!not!otherwise!be!willing!to,!and!increasing!flexibility!in!how!transactions!can!be!enforced.!This!can!facilitate!an!investment,!for!instance:!a!fund!manager!may!be!more!willing!to!fund!a!firm!if!there!will!be!residual!value!if!it!fails,!which!is!related!to!the!business!and!can!prevent!a!manager!from!

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appropriating!the!value!of!the!investment!by!leaving!and!creating!a!new!firm!with!the!knowledge!gained!from!the!first.!

A!fundamental!question!raised!by!this!line!of!research!is!whether!patent!protection!overall—taking!into!account!the!cost!of!obtaining!a!patent,!the!present!stance!of!antitrust!law!towards!them,!the!standard!for!obtaining!one,!the!ease!of!enforcing!it,!and!the!remedies!available—is!too!strong!or!too!weak.!Although!current!law!in!these!areas,!especially!patentability!doctrines!(such!as!subject!matter!eligibility!and!obviousness)!and!the!standard!for!injunctive!relief,!has!been!criticized,!in!the!legal!literature!many!such!criticisms!remain!qualitative.!Changing!this!is!hindered!by!the!difficulty!of!quantitatively!determining!the!extent!to!which!anticommons!dynamics!prevail!in!practice.!

The!problem!of!interrelated,!blocking!patents!has!been!studied!in!the!economic!literature!as!well!(Shapiro,!2001).!Shapiro!noted!that!cumulative!innovation!requires!a!series!of!steps!to!produce!an!innovation!capable!of!end!use!by!consumers,!each!of!them!potentially!patentable,!leading!to!holdup!problems.!Shapiro!identified!several!ways!in!which!the!market!has!mitigated!the!effect!of!such!problems!in!complexStechnology!industries,!where!a!particular!product!may!be!covered!by!hundreds!or!thousands!of!patents.!This!problem!can!be!exacerbated!by!low!patent!standards,!resulting!in!suboptimal!R&D!incentives!(Bessen,!2003).!Demonstrating!the!value!of!network!analytic!tools!in!searching!for!thickets,!Clarkson!and!DeKorte!(2006)!illustrated!with!visual!methods!that!patent!thickets!may!be!present!in!nanotechnology!patents.!Meanwhile,!an!examination!of!the!impact!of!thickets!on!startup!companies!indicated!that!venture!financing!may!be!delayed!in!industries!characterized!by!denser!thickets!(Cockburn!&!MacGarvie,!2007).!Patent!thickets!can!lead!firms!to!be!more!likely!to!license!outside!IP,!and!such!licensing!can!in!turn!reduce!innovative!performance!for!some!firms!(Cockburn,!MacGarvie,!&!Müller,!2010).!

Industry!has!developed!several!forms!of!licensing!to!ameliorate!the!impact!of!patent!right!fragmentation.!In!cross!licenses,!firms!that!are!the!ultimate!manufacturers!themselves!directly!grant!each!other!the!right!to!practice!inventions,!possibly!with!royalty!payments!in!one!direction.!In!patent!pools!and!package!licenses,!groups!of!patents!are!licensed!together.!This!avoids!the!anticommons!problem!by!ensuring!that!any!licensee!can!manufacture!the!product!(or!offer!a!service)!with!a!single!license.!It!does,!however,!require!advance!information!about!which!patents!are!relevant!to!a!particular!invention.!When!a!patent!turns!out!to!be!unexpectedly!relevant,!its!owner!will!then!have!holdup!power,!as!it!can!use!its!effective!veto!over!the!practice!of!the!standard!to!demand!more!than!the!value!of!its!work’s!contribution!to!the!technology.!Finally,!industry!standard!setting!organizations!(such!as!for!the!MPEG!video!standard)!develop!interoperable!specifications!meant!to!be!followed!by!many!firms!in!an!industry,!and!often!use!patent!pools!or!other!IP!rights!policies!to!guarantee!access!to!technology.!

2.2.3 Patent&citation&networks&Although!networkSbased!analyses!of!patent!citations!have!been!rare,!several!

have!occurred!and!are!noteworthy.!Examining!thickets!is!one!of!the!important!ways!

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in!which!they!have!been!used,!and!was!already!addressed!above!(Clarkson,!2004;!von!Graevenitz,!Wagner,!&!Harhoff,!2011).!

In!the!legal!literature,!the!main!examination!of!patent!citation!networks!has!been!by!Katherine!Strandburg!and!several!coauthors!familiar!with!uses!of!networks!in!the!physical!sciences!(Strandburg!et!al.,!2006;!Strandburg,!Csardi,!Tobochnik,!&!Erdi,!2008).!Noting!relatively!few!uses!of!network!science!in!law,!with!the!main!exceptions!being!a!small!number!of!studies!of!legal!case!citation!networks!(Chandler,!2005;!Smith,!2005),!they!examined!the!distribution!of!patent!citations!over!time.!They!compared!the!overall!structure!of!the!patent!citation!network!to!other!networks!on!several!measurements,!such!as!diameter,!and!found!evidence!that!a!patent’s!likelihood!of!being!cited!was!decreasing!over!time,!and!suggested!this!was!evidence!of!a!change!in!patent!quality.!

In!the!economic!literature!Podolny!and!Stuart!(1995)!investigated!a!notion!of!technological!niches!using!ties!between!patents!that!cite!or!are!cited!by!a!given!patent.!Belenzon!(2006)!used!relationships!between!a!patent’s!child!patents!(i.e.,!patents!citing!it),!grandchild,!and!further!descendants!to!examine!knowledge!flows.!These!relations!were!used!as!proxies!for!knowledge!flows:!if!one!company’s!patent!had!a!child!and!grandchild!at!another!company,!the!latter!had!received!some!spillover!knowledge!from!the!former.!Measurements!of!spillovers!of!knowledge!from!one!company!to!another,!or!within!the!same!company,!appeared!related!to!value.!

2.3 Networks&overview&There!are!many!ways!of!analyzing!network!structures!like!citations.!Much!of!

the!foundational!work!in!this!field!comes!from!physics,!sociology,!or!computer!science.!Many!of!the!tools!described!below!were!developed!to!analyze!social!networks,!principally!by!statisticians!working!with!sociologists,!although!the!field!of!networks!has!seen!several!reinventions!of!the!wheel,!with!some!of!these!tools!created!independently!in!different!fields.!Some!of!these!methods!have!been!applied!to!citation!networks!in!the!context!of!scientific!publications.!Many!others!have!been!applied!to!social!networks,!such!as!ties!between!animals!in!a!herd!inferred!from!which!animals!tended!to!communicate!with!each!other!more.!

A!network!! = (!,!)!is!a!set!of!nodes!!!and!edges!!.!(These!terms!have!synonyms:!networks!are!also!called!graphs,!nodes!are!called!vertices,!and!edges!are!called!arcs,!links,!or!arrows.)!Each!edge!is!an!ordered!pair! !, ! ∈ !,!and!indicates!a!connection!or!association!between!the!nodes!!!and!!,!such!as!friendship!where!the!nodes!are!people.!Networks!can!be!directed!or!undirected,!depending!on!whether!the!relationship!between!the!nodes!is!symmetric!or!possibly!asymmetric:!a!directed!network!is!one!where!if! !, ! !exists!then!the!edge!in!the!opposite!direction! !, ! !might!or!might!not!exist.!These!networks!can!be!pictured!as!a!collection!of!dots!to!represent!the!nodes,!with!arrows!between!them!to!represent!edges.!An!undirected!network!is!one!where!if!one!edge!exists,!the!edge!in!the!other!direction!does!also.!In!this!case!the!two!edges!are!often!not!distinguished!as!separate!entities,!and!the!picture!is!drawn!with!a!single!line!with!no!arrow!on!either!end!between!the!nodes.!

Networks!can!be!represented!in!the!form!of!sets,!as!described!above,!and!also!in!the!form!of!adjacency!matrices.!In!the!adjacency!matrix!form!each!node!is!

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represented!by!a!number!beginning!from!one.!The!adjacency!matrix!represents!the!edges!and!the!value!of!the!matrix!element!in!row!!,!column!!,!is!one!if!there!is!an!edge!between!those!nodes,!and!zero!if!not.!For!undirected!networks,!the!adjacency!matrix!is!symmetric.!

In!the!context!of!publications,!one!normally!will!represent!a!paper!or!patent!as!a!node!and!a!citation!as!an!edge!(in!a!directed!graph).2!In!the!case!of!patents,!there!can!be!no!cycles!in!the!graph—that!is,!no!circular!paths!where!one!can!proceed!from!one!node!to!the!next,!ultimately!ending!up!at!the!beginning.!This!is!because!patents!can!be!ordered!by!publication!date,!and!in!this!ordering!each!patent!should!have!citations!only!to!earlier!patents.!

Although!citation!networks!are!directed,!in!practice,!we!sometimes!take!the!undirected!version!of!the!graph!(making!it!symmetric!by!not!distinguishing!which!way!the!citation!points),!because!some!of!the!algorithms!that!are!of!interest!are!designed!for!undirected!graphs.!

A!variety!of!measurements!of!qualities!of!nodes!have!been!developed.!One!kind!of!measurement,!sometimes!used!for!networks!of!communicating!actors,!is!called!centrality!(Freeman,!1979;!Wasserman!&!Faust,!1994).!Centrality!measurements!are!designed!to!indicate!how!central!or!prominent!a!location!in!a!network!a!node!has.!In!the!context!of!communicating!actors,!centrality!may!indicate!the!ability!to!control!the!flow!of!information!through!the!network.!

Several!different!kinds!of!centrality!measurement!have!been!developed.!A!particularly!simple!kind!is!indegree!centrality,!which!is!the!number!of!edges!a!node!has!coming!into!it.!(There!is!a!corresponding!notion!of!outdegree!centrality.)!This!is!obviously!the!same!as!a!citation!count!in!the!case!of!a!citation!network.!

Betweenness!centrality!is!a!network!measurement!that!has!been!studied!less!in!the!patent!literature.!It!is!calculated,!for!a!given!node!!!by!finding,!for!each!pair!of!nodes!!!and!!!in!the!network,!the!shortest!path!in!the!network!from!!!to!!.!The!number!of!such!paths!that!!!is!on!is!the!betweenness!centrality!of!!.!For!instance,!Figure!1!shows!a!small!citation!network,!where!the!arrows!indicate!citation!relationships!(patent!a!cites!patent!b,!for!example).!In!this!network,!the!betweenness!centrality!of!b!is!two:!for!each!of!the!pairs!(a,!c)!and!(d,!c)!the!shortest!path!between!them!passes!through!b.!Note!that!the!direction!of!the!citation!is!being!shown!by!the!arrow.!

When!there!is!more!than!one!shortest!path!from!!!to!!,!!!receives!a!fractional!increase!in!its!score!for!each!of!them:!

! !,! = ! !(!, !, !)!(!, !)

!,!!∈!;!,!!!!;!!!!

where!!(!, !, !)!is!the!number!of!shortest!paths!from!!!to!!!that!include!!,!!(!, !)!is!the!total!number!of!shortest!paths!from!!!to!!,!and!the!fraction!is!considered!to!be!zero!when!the!denominator!is!zero.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!2!There!are!other!ways!to!use!networks!in!studying!patents!or!publications.!For!instance!nodes!can!represent!assignees!and!edges!can!represent!interSassignee!citations.!(Harhoff,!von!Graevenitz,!&!Wagner,!2008;!von!Graevenitz,!Wagner,!&!Harhoff,!2011)!

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Another!measurement!of!centrality!is!eigenvector!centrality,!which!is!based!on!the!eigenvectors!of!the!adjacency!matrix.!Intuitively,!this!measurement!assigns!each!node!a!centrality!score!that!depends!on!which!nodes!have!edges!to!it,!weighting!those!nodes!by!their!own!centrality.!It!is!calculated!by!finding!the!largest!eigenvalue!of!the!adjacency!matrix.!The!elements!of!the!eigenvector!of!that!eigenvalue!are!the!centrality!scores.!

Eigenvector!centrality!is!similar!to!the!PageRank!algorithm!originally!used!in!the!Google!search!engine.!That!algorithm!can!be!understood!as!showing!a!probability!that!a!person!following!links!in!a!network!at!random!will!arrive!at!a!particular!web!page.!An!agent!starts!at!a!random!node,!and!follows!a!link!chosen!at!random!from!that!node.!This!iterates!indefinitely.!At!each!step!there!is!a!probability,!called!the!damping!factor,!that!the!agent!will!jump!to!a!random!node.!This!prevents!the!agent!from!ending!up!only!in!a!group!of!nodes!that!have!no!edges!going!back!to!the!rest!of!the!network.3!The!probability!of!reaching!a!particular!node!can!be!estimated!from!the!matrix!equation!

! = 1− !! !+ !!"+

where!!!is!the!vector!of!probabilities!to!be!solved!for,!!!is!the!damping!factor,!!!is!the!size!of!!!(the!set!of!patents).!!!is!a!modified!version!of!the!adjacency!matrix!!,!the!modification!being!to!normalize!the!entries!to!make!them!sum!to!one!(so!that!they!can!be!interpreted!as!probabilities).4!If!we!denote!the!elements!of!the!adjacency!matrix!!!by!!!" ,!where!the!indices!!, !!range!over!the!set!of!patents!!,!then!the!elements!!!" !of!the!modified!matrix!!!are!defined!by:!

!!" =!!"!!!!!!

!

In!addition!to!these,!there!are!other!weightedSwalk!concepts!that!can!be!used!to!calculate!centrality!statistics.!For!example,!information!centrality!has!a!means!of!weighting!short!walks!more!heavily,!and!closeness!measures!how!near!a!node!is!to!other!nodes,!based!on!an!average!of!the!shortestSpath!distance!to!other!nodes.!

2.4 Analysis&The!use!of!patent!citations!in!the!prior!literature,!along!with!the!theoretical!

reasons!for!believing!that!relationships!between!patents!are!a!significant!component!of!their!value,!lead!to!the!question!of!how!the!interrelationships!between!patents!can!be!quantitatively!used!to!improve!understanding!of!the!determinants!of!patent!value.!This!section!discusses!centrality!and!its!relevance!to!patent!value.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!3!In!comparison,!eigenvector!centrality!can!be!intuitively!understood!using!a!similar!linkSfollowing!model!but!without!the!damping!factor.!This!leads!groups!of!patents!that!lead!to!dead!ends!having!lower!centrality.!4!This!is!the!constraint!that!each!outgoing!link!from!a!node!has!an!equal!chance!of!being!chosen!and!the!probabilities!sum!to!one.!I!omit!the!equations!for!dead!ends!with!no!outgoing!links;!on!reaching!one!of!them,!the!agent!jumps!to!a!random!node.!

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2.4.1 Patent&portfolios,&market&saturation,&and&value&This!section!discusses!patent!portfolio!races!and!their!relationship!to!value.!

As!noted!by!Parchomovsky!and!Wagner!(2005),!patent!portfolio!value!plays!a!major!role!in!the!dynamics!of!patent!portfolio!value.!Large!portfolios!have!some!key!advantages!over!smaller!groups!of!patents:!they!can!increase!freedom!to!operate!in!the!markets!they!relate!to,!increase!the!firm’s!ability!to!defend!its!markets,!and!reduce!the!uncertainty!inherent!in!owning!patents.!There!are!several!ways!in!which!firms!may!find!themselves!seeking!to!grow!their!portfolios!at!each!others’!expense.!This!section!describes!a!specific!example!way!that!the!strategic!dynamics!in!a!patenting!industry!can!lead!firms!to!seek!to!grow!their!portfolios!in!a!way!that!conflicts!with!other!industry!participants.!

To!motivate!the!following!discussion,!consider!a!complex!modern!product!such!as!a!mobile!phone.!This!type!of!device!is!in!a!complex!industry!characterized!by!composition!of!many!pieces!of!different!functionality,!such!as!memory,!display,!touchSsensitive!components,!sensors,!user!interface!innovations,!radios,!and!other!components.!Each!of!these!may!be!covered!by!dozens!or!more!patents.!As!a!result,!a!single!consumer!device!may!be!covered!by!many!patents,!easily!in!the!thousands.!In!this!environment,!many!firms!develop!patents!covering!the!device!that!can!potentially!be!used!against!their!competitors,!resulting!in!substantial!overlapping!property!rights.!

Generally,!the!value!of!a!patent!is!that!it!can!exclude!a!competitor!from!a!specific!business!or!product,!at!least!temporarily.!In!complex!spaces!involving!many!patents,!though,!it!is!unlikely!that!a!given!patent!will!permanently!block!a!competitor!from!an!entire!product!category,!at!least!in!the!case!of!large!firms.!Instead,!the!competitor!is!likely!to!be!able!to!design!around!the!patent,!or!switch!to!a!substitute!product,!perhaps!one!that!it!has!a!patent!on!itself.!

A!lawsuit!may!result!in!the!patentee!excluding!the!competitor!from!the!value!of!a!particular!feature!that!it!had!a!hand!in!creating,!which!is!the!intent!behind!the!patent!system.!But!in!practice,!a!more!important!effect!may!be!to!prevent!sales!in!a!particular!category!for!a!limited!period!of!time!while!the!competitor!adapts!to!avoid!the!patent.!This!can!be!valuable!for!immediate!profit,!or!indirectly!by!preventing!the!competitor!from!gaining!market!share!at!a!critical!period!in!the!industry’s!lifecycle.!In!some!cases!the!value!of!a!patent,!then,!is!to!hinder!the!competition!in!a!broader!area!rather!than!to!exclude!it!totally!in!a!small!one.!In!those!cases,!the!value!of!patents!as!an!offensive!tool!may!be!more!significant!than!the!incremental!value!of!the!invention!protected.!

Where!this!happens,!it!should!lead!to!several!effects.!First,!patentees!should!attempt!to!acquire!patents!in!areas!where!they!expect!the!industry!is!likely!moving,!in!the!hopes!that!competitors!will!infringe!on!one.!For!example,!they!may!patent!elements!in!standards!or!that!are!likely!to!be!used!in!future!standards,!in!order!to!potentially!block!the!use!of!the!associated!technology.!Second,!patentees!in!these!industries!may!adopt!a!scattershot!approach!of!obtaining!many!patents!in!numerous!areas,!even!if!for!some!the!underlying!innovation!does!not!have!high!

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value.!Third,!these!effects!should!lower!patent!value!on!average,!and!should!lead!to!defensive!patenting!in!response.5!

Defensive!patenting!is!a!response!to!patenting!by!competitors!who!may!use!their!patents!to!interfere!with!a!line!of!business.!This!can!lead!to!positive!feedback!resulting!in!more!patents.!This!feedback!is!a!secondSorder!effect!causing!it!to!remain!individually!rational!for!firms!to!patent!even!though!perSpatent!private!value!drops.!

The!pattern!of!patent!stockpiling!for!future!tactical!use,!along!with!defensive!patenting,!can!lead!to!the!mutuallySassuredSdestruction!dynamic!that!has!been!discussed!in!the!literature,!in!which!multiple!companies!engage!in!patent!portfolio!stockpiling.!

In!these!situations,!the!majority!of!patents!may!have!low!value!because!they!cover!lowSvalue!inventions!and!will!probably!not!be!used—they!are!being!held!as!tools!to!threaten!a!competitor!with!litigation!in!the!future.!Where!the!patents!are!less!valuable,!but!retain!possible!tactical!use,!they!will!prompt!further!defensive!patents!in!the!same!space!which!will!lead!to!more!patents,!which!(because!they!would!not!have!been!obtained!except!because!of!defensive!need)!in!turn!have!lower!average!private!value.!

The!effect!of!portfolio!races!can!exacerbate!the!effect!of!other!aspects!of!the!patent!system.!Because!a!patent!may!be!valuable!to!its!owner!even!when!the!underlying!innovation!is!not!particularly!interesting!or!valuable,!a!selfScorrecting!feature!of!the!patent!system!may!not!fully!operate.!A!patent’s!value!is!generally!related!to!how!valuable!the!innovation!it!covers!is:!potential!infringers!(or!customers)!can!choose!not!to!use!an!invention,!and!avoid!paying!royalties.!Less!valuable!patents!will!receive!lower!royalty!payments.!This!tends!to!reduce!the!number!of!lowSvalue!patents.!

Where!the!economic!impact!of!patents!is!less!related!to!the!value!they!add,!however,!other!doctrines!of!patent!law,!especially!obviousness,!become!a!more!important!limiting!factor!on!the!growth!in!patents.!Obviousness!limits!what!patents!can!be!acquired.!The!obviousness!standard!as!applied!in!practice,!however,!has!been!criticized!in!the!past!by!several!writers!as!being!too!lenient.!When!the!standard!is!low,!the!use!of!patents!to!temporarily!hinder!competitors!in!the!related!product!may!be!a!greater!component!of!value!than!the!exclusive!value!of!the!actual!innovation!the!patent!represents.!

In!any!event,!a!patent!arms!race!can!be!an!inefficient!outcome!for!the!industry,!in!that!all!players!may!have!been!better!off!if!the!option!of!entering!into!a!patent!portfolio!race!had!not!been!there.!The!arms!race!dynamic!leads!to!more!patents!in!the!industry!that!cover!the!same!economic!space,!having!more!overlapping!claims.!Because!the!portfolio!race!is!a!wasteful!outcome!in!which!many!firms!could!have!avoided!the!cost!of!obtaining!patents!if!they!had!been!able!to!act!cooperatively,!the!apparent!value!of!the!patent!to!the!enterprise!may!be!lower!as!a!result.!By!the!apparent!value,!I!do!not!mean!the!value!of!the!patents!on!the!secondary!market:!they!may!in!fact!have!significant!value!on!the!secondary!market.!Rather,!I!mean!that!such!patents!will!be!correlated!with!lower!market!value:!a!firm!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!5!These!portfolio!races!have!been!described!as!a!reason!for!patenting!in!interviews!by!industry!participants!(Hall!&!Ziedonis,!2001).!

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that!owns!them!is!necessarily!in!a!space!where!it!wound!up!in!a!portfolio!race!to!begin!with,!with!the!costs!and!hazards!from!competitors!that!implies.!As!a!result,!such!patents!may!be!associated!with!lower!firm!market!value.!

Here,!the!racing!behavior!leads!to!more!overlapping!patent!claims!on!the!same!economic!space,!and!also!to!lower!economic!value!of!patents.!In!searching!for!evidence!of!this,!the!effect!of!relationships!between!patents!is!significant.!Where!patents!tend!to!cover!the!same!products,!they!will!have!denser!citation!networks.!This!should!therefore!lead!to!a!lower!average!patent!value!where!networks!are!most!dense.!

2.4.2 Citation&generation&and&saturation&This!section!describes!a!hypothetical!citationSgenerating!process!to!show!

more!clearly!how!market!saturation!can!impact!the!citation!structure.!This!will!make!clearer!how!it!can!influence!centrality!scores.!The!framework!here!is!similar!to!but!differs!from!one!presented!by!Harhoff,!von!Graevenitz,!and!Wagner!(2008).!It!describes!how!immediate!citations!can!indicate!value!while!farther!out,!but!nearby,!tightly!interlocking!citations!indicate!saturation.6!

To!describe!how!more!dense!networks!can!indicate!lower!value!more!precisely,!consider!the!following!threeSlevel!structure!of!market!spaces!and!patents,!which!can!be!thought!of!as!a!description!of!a!process!that!generates!patents.!At!the!highest!level,!a!random!process!generates!a!set!of!market!opportunities!indexed!by!!,!!! .!These!are!not!directly!observed!in!the!available!data.!These!are!realSworld!problems!that!technology!can!help!to!solve,!or!categories!of!products!that!large!organizations!can!provide.!

At!a!lower!level,!a!random!process!generates!a!set!of!features!of!products!or!services!that!address!each!of!the!opportunities!!! !indexed!by!!:!!!,! .!These!features!are!also!not!observed!directly!in!the!patent!network,!and!what!they!represent!in!realSworld!terms!is!left!open.7.!Each!feature!improves!the!product!that!addresses!the!opportunity!to!some!extent,!but!they!are!not!all!equal;!some!are!more!valuable!than!others.!

The!set!of!features!should!be!thought!of!as!a!network!in!their!own!right,!which!models!a!portfolio!race!dynamic!in!the!space!of!possible!inventions.!If!a!feature!is!related!to!another!(equivalently,!it!is!associated!with!the!same!underlying!opportunity!as!the!other!or!has!an!edge!to!the!other),!it!tends!to!compete!for!value!with!the!other!where!each!has!a!veto!right!and!transactional!costs!or!other!frictions!arise.!Thus!an!actor!that!has!exclusive!control!over!a!feature!that!is!solely!necessary!to!solve!a!commercial!problem!can!receive!all!the!gains!from!the!solution.!A!feature!that!is!closely!tied!in!the!feature!network!to!others!may!be!patented!for!arms!race!reasons:!to!prevent!another!individual!firm!or!group!from!exercising!sole!control!over!the!market!opportunity!at!issue.!Such!a!patent!may!be!valuable!in!the!sense!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!6!Harhoff!et!al.,!in!contrast,!does!not!address!value!and!saturation!at!the!same!time!and!instead!focus!on!technological!complexity!and!opportunity.!7!They!are!referred!to!as!features!for!concreteness,!but!in!a!complex!technology!they!could!be!many!aspects!of!a!good!or!service,!such!as!components!that!are!integrated!into!a!single!product.!

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that!it!can!receive!value!from!holding!up!others,!but!having!more!neighbors!in!this!space!still!indicates!fragmentation!of!property!rights!and!a!potential!cost!from!strategic!holdup,!of!the!kind!that!one!might!see!in!(for!example)!more!complex!technologies!that!are!more!subject!to!competing!patent!claims.!

Patents!are!modeled!at!a!level!below!this.!At!this!third!level,!each!competitor!in!the!relevant!market!sees!a!stream!of!innovations,!each!of!which!is!associated!with!a!relevant!feature,!and!can!choose!to!patent!or!not!patent!each.!The!patents!that!result!are!observed,!indexed!by!!!for!each!!!and!!,!!!,!,! .!The!overall!system!thus!has!three!levels,!the!last!of!which!is!observed.!

In!addition!to!these!patents,!researchers!also!observe!citations.!I!assume!that!citations!are!related!to!the!unobserved!networks!in!a!natural!way:!if!two!patents!are!associated!with!the!same!feature,!then!they!are!more!likely!to!have!a!citation!between!them,!and!likewise!(but!less!strongly)!if!the!two!patents!are!associated!with!feature!that!are!close!to!each!other!in!the!feature!space.!This!is!assumed!to!occur!because!citations!appear!where!patents!are!related!to!each!other!by!technology!or!at!least!market!being!addressed,!and!more!closely!similar!patents!are!more!likely!to!be!sufficiently!similar!that!a!citation!will!be!legally!required.!

These!assumptions!imply!that!citations!should!be!related!to!patent!value:!each!citation!indicates!that!firms!are!interested!in!the!area!a!patent!is!in!and!chose!to!patent!in!it.!A!patent!in!the!right!technical!area!and!related!to!a!valuable!market!opportunity!can!provide!a!part!of!their!economic!value.!

They!are!also!affected!by!the!interaction!between!one!feature!of!a!product!and!another.!Due!to!patent!portfolio!races,!a!patent!on!a!feature!that!is!more!densely!surrounded!by!other!features!may!be!indicative!of!being!in!an!unprofitable!strategic!dynamic!where!firms!expend!resources!to!obtain!holdup!value.!

This!can!be!measured!by!looking!beyond!the!closest!neighbors!of!a!patent.!The!higherSlevel!structure!of!the!network!of!features!appears!in!the!lowerSlevel!structure!of!patent!citations,!and!can!be!recovered!through!the!right!network!measure.8!

PageRank!and!betweenness!are!centrality!measures!that!should!be!expected!to!do!this.!Recalling!the!linkSfollowing!agent!description!of!the!PageRank!algorithm!above,!an!agent!that!randomly!follows!citation!links!will!tend!to!spend!more!time!in!areas!that!are!more!densely!interconnected!with!regions!that!themselves!are!more!interconnected.!

Similarly,!betweenness!centrality!identifies!patents!that!are!more!centrally!located!on!crossroads!between!different!patents.!A!patent!in!a!feature!that!is!closely!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!8!Given!the!hypothesized!structure,!one!might!naturally!attempt!to!classify!patents!automatically!into!groups!using!their!citations,!and!in!fact!there!are!network!tools!that!attempt!to!do!this!sort!of!classification,!described!in!chapter!4.!However,!results!with!them!suggest!that!significant!tuning!would!likely!be!needed!to!produce!groups!of!the!right!size.!(Essentially,!they!seek!out!natural!collections!in!the!citation!structure,!and!these!tend!to!lead!to!large!groups!that!more!plausibly!describe!an!entire!technology!rather!than!a!particular!cluster!of!closely!economically!related!patents.)!

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linked!with!other!features!will!be!more!likely!to!be!present!on!shortest!paths!between!two!features,!and!therefore!more!likely!to!be!on!shortest!paths!between!patents!in!neighboring!features!and!have!higher!betweenness.!

These!considerations!lead!to!the!hypothesis!that!patent!centrality!measurements,!after!adjusting!for!citations,!are!negatively!associated!with!patent!value.!

2.4.3 Simulation&of&citation&generation&As!a!demonstration!of!the!threeSlevel!model!described!above!and!the!ability!

of!changes!in!it!to!impact!patent!centrality,!I!construct!simulated!networks.!The!construction!directly!follows!the!threeSlevel!structure!described!above.!

As!described,!before!patents!and!citations!are!generated!there!exists!a!set!of!market!opportunities!and!related!features.!I!construct!a!set!of!1000!opportunities,!each!having!from!1!to!10!associated!features!(equally!divided,!so!that!100!of!the!opportunities!have!1!associated!feature,!100!have!2,!and!so!forth).!I!assume!that!for!each!feature!one!patent!is!possible!and!it!is!patented!by!someone!in!the!market.!The!patents!are!created!in!a!random!order,!so!for!instance!each!feature!of!each!opportunity!is!equally!likely!to!be!first.!

Citations!are!generated!by!a!random!process!that!takes!into!account!this!ordering!and!whether!a!patent!is!associated!with!prior!patents!in!the!same!opportunity.!A!patent!can!only!cite!to!patents!that!were!created!before!it,!not!after.!For!each!earlier!patent!not!in!the!same!opportunity,!a!citation!is!generated!with!probability!1/p!where!p!is!the!number!of!prior!patents.!If!an!earlier!patent!is!in!the!same!opportunity,!however,!the!patent!cites!it!with!certainty.!This!can!be!thought!of!as!modeling!practical!citation!dynamics!(like!the!patent!prosecutor’s!ethical!obligation!to!inform!the!patent!office!of!known!relevant!prior!art).!

With!these!figures,!a!simulated!network!will!have!5,500!patents.!Since!the!PageRank!of!all!nodes!in!the!network!will!sum!to!one!(recall!that!PageRank!can!be!interpreted!as!the!probability!of!a!random!linkSsurfer!ending!on!a!particular!node),!the!mean!PageRank!will!be!1/5,500!(or!0.000182).!The!actual!PageRank!varies!between!patents!with!on!average!a!patent!in!one!of!the!10Sfeature!opportunities!having!close!to!twice!times!the!PageRank!of!a!patent!in!one!of!the!1Sfeature!opportunities.!Betweenness!likewise!varies,!with!a!patent!in!a!10Sfeature!opportunity!having!between!three!and!four!times!the!betweenness!of!patent!in!a!oneSfeature!opportunity.!Under!repeated!tStesting!in!simulations,!the!PageRank!of!high!and!low!feature!patents!were!distinguishable!90%!of!the!time!(at!the!5%!significance!level),!and!their!betweenness!was!distinguishable!70%!of!the!time.!

Adjustable!parameters!here!include!the!overall!number!of!opportunities,!the!maximum!number!of!features!per!opportunity,!the!background!citation!density!(likelihood!of!citing!to!a!differentSopportunity!patent),!and!the!likelihood!of!citing!to!a!sameSopportunity!patent.!Where!the!number!of!opportunities!becomes!small!enough—with!other!parameters!held!the!same,!below!a!few!hundred—the!method!becomes!unable!to!reliably!distinguish!between!patents!in!highS!and!lowSfeature!opportunities.!Similarly,!where!the!highest!number!of!features!per!opportunity!is!low!(below!about!four,!with!other!parameters!held!the!same),!there!is!too!little!difference!between!highS!and!lowSfeature!opportunities!for!the!method!to!

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distinguish!them.!Higher!background!citation!density!and!a!lower!likelihood!of!withinSopportunity!citation!also!prevent!this!method!from!distinguishing!between!patents!in!highS!and!lowSfeature!opportunities.!

These!situations!are!all!generally!a!lack!of!data!or!an!effect!size!that!is!too!small!for!a!centrality!measurement!to!pick!up.!Those!issues!are!unlikely!to!prevent!centrality!from!being!related!to!the!phenomena!of!interest!in!the!actual!patent!network.!For!instance,!a!high!background!citation!rate!independent!of!the!opportunitySfeature!structure!creates!noise!in!the!network!that!one!might!only!overcome!with!a!large!amount!of!data,!and!a!small!number!of!opportunities!in!part!reduces!the!relevant!sample!size.!A!high!background!citation!rate!is!less!likely!to!occur!because!citations!are!heavily!technologySdriven,!and!the!number!of!realSworld!market!opportunities!the!patent!network!reflects!is!large.!

2.5 Data&and&results&Two!principal!data!sets!are!used!in!the!empirical!tests!described!below.!First,!

I!obtained!data!on!patents!and!citations!between!between!them!from!the!NBER!patent!data!project!(Hall,!Jaffe,!&!Trajtenberg,!2001).!This!data!file!contains!information!on!patent!bibliographic!information,!in!cleaned!form.!It!also!includes!classifications!of!patents!into!broader!categories!than!the!US!patent!class!and!subclass!numbers,!and!a!matching!data!set!connecting!patent!assignees!to!Compustat!firms.!This!match!was!developed!by!the!NBER!by!matching!names!and!using!indexes!of!corporate!subsidiary!ownership,!as!described!in!more!detail!by!Hall,!Jaffe,!and!Trajtenberg!(2001,!2005).9!!

Second,!I!obtained!data!on!public!companies!from!Compustat,!including!information!on!R&D!spending,!market!capitalization,!book!value,!industry,!stock!price,!and!other!information.!The!set!of!companies!was!limited!to!USSbased!companies!in!manufacturing!sectors!(SIC!codes!2000!to!3999)!with!at!least!100!employees!and!$5!million!in!assets,!and!that!were!traded!in!U.S.!dollars!on!the!NYSE,!the!American!Stock!Exchange,!NASDAQ,!or!NYSE!Arca.!

Table!6!includes!descriptive!information!about!the!companies.!There!were!2452!firms!and!21,548!firmSyear!observations!for!companies!with!these!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!9!As!they!explain,!the!patentSCompustat!match!is!inherently!noisy,!due!to!its!reliance!on!corporate!names!and!on!voluntarily!filed!patent!assignment!data.!Hall,!Jaffe,!and!Trajtenberg!report!that!approximately!50S65%!of!patent!grants!were!successfully!matched,!but!that!remaining!(and!possibly!significant)!errors!could!not!be!ruled!out.!The!match!omits,!for!instance,!cases!where!a!firm!systematically!does!not!file!assignment!documents!on!the!proper!schedule!(in!some!cases,!specifically!to!obscure!ownership).!There!is!no!obligation!on!patent!applicants!to!file!assignment!documents!in!the!U.S.,!although!there!is!some!protection!for!those!who!do!so!over!possible!other!entities!claiming!ownership!of!the!same!patent.!When!two!entities!claim!ownership!of!the!same!patent,!the!one!that!files!its!documentation!of!ownership!first!can!prevail!over!the!other!(subject!to!some!conditions).!This!type!of!dispute!is!rare!in!practice,!which!is!why!some!firms!may!choose!not!to!file.!The!identity!of!the!owner!will!become!public!knowledge!when!the!patent!is!enforced!by!suit,!although!it!need!not!otherwise.!

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characteristics.!Tobin’s!q!was!estimated!as!the!ratio!of!the!market!value!of!assets!to!the!book!value!of!assets.!The!market!value!of!assets!was!calculated!as!the!book!value!of!assets,!minus!the!portion!of!the!book!value!of!assets!belonging!to!shareholders!(i.e.,!assets!minus!liabilities),!plus!the!market!value!of!stock!(i.e.,!the!share!price!times!the!number!of!shares!outstanding).10!This!approach,!of!estimating!Q!as!a!ratio!between!the!market!and!book!value!of!assets,!has!been!regularly!used!in!the!literature!(Bebchuk!&!Cohen,!2005;!Cohen,!Polk,!&!Vuolteenaho,!2003;!Fama!&!French,!2002;!Gompers,!Ishii,!&!Metrick,!2003;!Kaplan!&!Zingales,!1997;!Malmendier!&!Tate,!2005).!An!advantage!this!method!has!over!other!methods,!which!calculate!a!capital!stock!from!financial!data!in!the!denominator,!is!that!it!is!relatively!straightforward!to!estimate!while!having!a!very!high!correlation!with!the!results!of!those!methods!(Chung!&!Pruitt,!1994).!

R&D!stocks!were!calculated!with!a!decliningSbalance!formula!with!a!15%!depreciation!rate.!Similar!decliningSbalance!calculations!were!made!for!patent!counts,!citation!counts,!and!centrality!(discussed!in!the!following!section).!Each!flow!value!(R&D,!patent!count,!citation!count,!or!centrality)!was!assigned!to!a!firmSyear!observation!and!a!stock!calculated!as!a!sum!of!current!and!past!flows!depreciated!over!time.!This!depreciation!rate!was!set!to!15%,!for!consistency!with!many!other!papers!in!the!related!literature.!

Truncation!issues!are!present!at!both!the!earliest!and!latest!years!for!all!these!variables.!For!patent!counts,!for!instance,!the!stocks!cannot!be!calculated!accurately!for!the!earliest!dates!where!prior!patent!data!is!not!available.!To!address!this!I!limited!the!sample!to!firmSyear!observations!in!the!range!1979!–!1998.!Truncation!is!notably!of!importance!for!centrality!because!it!affects!how!the!measures!behave.!That!along!with!other!aspects!of!the!centrality!calculation!are!discussed!next.!

2.5.1 Centrality&measurement&and&descriptive&statistics&

2.5.1.1 Description/of/the/centrality/measurements/To!calculate!the!centralities!for!each!time,!a!network!of!all!citations!

(including!those!for!firms!outside!the!Compustat!match!or!excluded!from!the!sample)!was!constructed!and!the!centrality!values!were!constructed!on!them.!I!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!10!The!precise!calculation!followed!Fama!and!French!(2002),!Cohen,!Polk,!and!Vuolteenaho!(2003),!and!Malmendier!and!Tate!(2005).!Following!the!method!of!those!papers,!book!assets!were!obtained!directly!from!balance!sheet!data!(Compustat!variable!AT),!and!market!assets!were!calculated!as!book!assets!(AT)!minus!book!equity!plus!the!market!capitalization!(CSHO!times!PRCC).!Book!equity!was!calculated!as!shareholders’!equity!(SEQ)!if!it!was!available!(or!if!not!available,!either!the!book!value!of!common!equity!plus!the!par!value!of!preferred!stock!(CEQ!+!PSTK),!or!else!assets!minus!liabilities!(AT!–!LT));!less!the!first!available!of!the!preferred!stock!liquidating!value!(PSTKL),!redemption!value!(PSTKRV),!or!par!value!(PSTK);!plus!deferred!taxes!and!investment!tax!credit!if!available!(TXDITC);!minus!postSretirement!assets!if!available!(PRCA).!

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began!by!investigating!three!centrality!scores!of!interest:!eigenvector,!PageRank,!and!betweenness!centrality.!

The!definitions!of!these!scores!are!described!above.!Eigenvector!centrality!was!calculated!through!a!matrix!manipulation!of!the!adjacency!graph.!PageRank!was!approximated!with!a!simulation!of!a!linkSwalking!agent.!Betweenness!was!estimated!by!a!formula!designed!for!handling!large!sparse!networks!efficiently.11!

Both!eigenvector!and!PageRank!measure!a!form!of!density!or!saturation!of!the!kind!described!above!in!section!2.4.1,!and!are!candidates!for!testing!for!holdup!effects!on!patent!market!value.!An!important!way!in!which!they!differ!involves!how!they!treat!patents!that!make!multiple!citations.!

Patents!do!not!all!make!the!same!number!of!citations;!some!patent!attorneys!add!many!citations!for!ethical!reasons,!to!limit!the!value!of!the!record!they!create,!or!to!provide!the!examiner!with!a!large!number!of!sources!to!look!at.!This!raises!the!question!of!whether!the!weight!of!a!citation!should!be!lower!if!the!citing!patent!makes!many!citations!than!if!it!makes!only!a!few.!PageRank!does!this:!as!described!above!in!section!2.3,!the!weights!on!outgoing!citations!are!adjusted!to!sum!to!one!(so!that!they!form!valid!probabilities!of!transition!in!the!linkSwalking!interpretation).!Eigenvector!centrality,!in!contrast,!weighs!each!citation!equally.12!

2.5.1.2 Descriptive/statistics/and/standardization/The!centrality!measures!are!described!in!Table!1,!Table!2,!and!Figure!8!

through!Figure!13.!The!raw!values!of!PageRank!and!eigenvector!centrality!are!between!zero!and!one,!and!usually!far!below!one;!in!the!case!of!PageRank!this!reflects!the!possible!interpretation!of!the!figure!as!the!probability!of!landing!on!a!patent!during!a!random!walk.!Betweenness!centrality,!reflecting!a!number!of!paths,!is!much!larger.!All!are!roughly!consistent!between!industries,!but!are!very!skewed;!most!patents!have!centralities!significantly!below!the!means.!

Eigenvector!centrality,!as!shown!in!Figure!11,!has!significant!variance!in!its!mean!over!time,!and!does!not!deal!as!gracefully!with!patents!with!only!one!citation.!PageRank!is!betterSbehaved!in!general!due!to!the!damping!factor!and!the!weighting!of!patents,!and!along!with!betweenness!centrality!is!greater!interest!than!eigenvector!centrality.!For!these!reasons!the!following!discussion,!and!the!regressions!below,!focus!on!PageRank!and!betweenness.!

The!distribution!of!centralities!by!application!year!varies!greatly.!Very!recent!patents!have!not!had!time!to!accumulate!any!citations,!and!do!not!have!any!centrality!for!the!same!reason!(they!have!no!citations,!which!is!how!they!get!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!11!The!formula!is!due!to!Brandes!(2001),!and!the!implementations!of!all!three!algorithms!are!from!the!igraph!library!(Csardi!&!Nepusz,!2006).!12!In!addition!to!these!considerations,!PageRank!has!a!variable!parameter,!the!damping!factor,!that!controls!how!frequently!the!linkSwalking!agent!makes!a!random!jump!(see!section!2.3).!The!figure!represents!a!tradeoff!between!the!centrality!measurement!being!dominated!by!the!global!behavior!of!the!entire!network!and!only!being!affected!by!nearby!patents.!That!parameter!was!set!to!85%,!which!is!commonly!used!in!network!analysis.!Experiments!with!other!figures!in!the!range!of!70%!to!95%!produced!essentially!similar!results!to!those!presented!below.!

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centrality).!Patents!in!the!middle!of!the!year!range!have!varying!centralities!depending!on!their!cohort.!In!order!to!correct!for!the!year!effects!I!divided!all!centralities!by!their!medians!for!that!year.!This!normalization!is!reflected!in!all!tables!except!the!first!two,!and!all!figures!except!Figure!8!through!Figure!13.!

In!addition!to!showing!that!year!effect,!the!graphs!in!Figure!8!through!Figure!13!also!show!that!the!measurements!may!become!erratic!near!the!edges!of!the!time!interval,!with!spikes.!The!lack!of!information!inherent!in!examining!patents!near!these!endpoints!makes!measurement!difficult!and!leads!to!inaccurate!values.!To!accommodate!this,!I!removed!from!the!sample!data!from!outside!the!range!of!1979!through!1998.!These!years!provide!a!time!period!with!spikes!near!the!ends!cut!off!and!without!the!periods!where!centrality!scores!were!most!steeply!rising!and!falling!due!to!the!start!or!end!of!data.!

This!rest!of!this!section!describes!the!centrality!measurements!qualitatively.!It!will!explore!how!centralities!differ!by!industry,!what!high!centrality!appears!to!be!related!to,!and!how!firm!portfolios!differ.!

Table!3!lists!the!10!highestScentrality!patents!(by!the!betweenness!measurement)!in!two!technological!areas.!Many!of!these!highSbetweenness!patents!in!the!computers!and!communications!area!concern!internal!combustion!engines.13!Most!patents!in!both!groups!are!from!1980!or!1981,!despite!the!fact!that!these!figures!were!adjusted!for!time!(by!dividing,!for!each!case,!by!the!overall!median!for!that!year).!(The!one!exception,!in!computers!and!communications,!received!over!1200!citations.)!This!suggests!that!overall!outliers!by!betweenness!are!generally!those!that!have!had!opportunity!to!accumulate!significant!followSon!descendants.!Although!the!details!aren’t!shown!on!this!table,!a!subjective!look!at!the!forward!and!backward!citations!of!the!listed!patents!indicates!they!all!received!citations!from!many!different!firms!in!the!same!technological!space.!

The!fact!that!most!of!these!patents!come!from!the!early!1980s,!the!start!of!the!sample,!raises!the!question!of!what!the!highestScentrality!patents!from!a!later!period!look!like.!Table!4!shows!the!10!highest!in!computers!and!communications!from!1996.!The!pattern!of!receiving!citations!from!many!different!firms!still!holds,!and!a!review!of!the!inventions!patented!indicates!that!the!patents!came!in!different!technological!subcategories,!that!received!substantial!later!attention!from!followSon!innovators.!

In!Figure!2,!we!compare!industries!more!directly.!The!ITC!fields,!computers!&!communications!and!electrical!patents,!appear!to!have!a!significantly!higher!centrality!than!other!patents.!(Note!that!this!figure!shows!the!logarithm!of!betweenness,!which!is!frequently!zero,!so!many!patents!are!omitted!from!the!diagram.)!Overall,!however,!the!patents!have!roughly!similar!distributions.!

Table!5!attempts!to!address!the!differences!between!industries!at!the!tail.!The!columns!show!the!number!of!patents!that!are!in!the!top!and!bottom!10%!by!both!betweenness!centrality!and!(forward)!citations.!Note!that!among!the!highScentrality,!highScitation!group!(column!5),!computers!and!communications!and!electrical!patents!are!substantially!overrepresented!compared!to!their!overall!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!13!The!patents!are!not!on!engines,!but!rather!are!on!microprocessor!control!systems!that!are!used!in!engines.!

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presence!in!the!population!(column!1).!Among!patents!with!high!centrality!but!low!citations!(column!4),!computers!and!communications!patents!are!underrepresented!and!other!industries!are!comparatively!similar!to!their!population!rate.!Further!analysis!could!explore!how!the!patterns!of!citations!differ!between!industries,!and!how!they!lead!to!these!differences.!

Overall,!cases!with!high!centrality!but!few!citations!are!relatively!uncommon,!as!Figure!3!shows.!This!figure!indicates!shows!the!centrality!distribution!of!each!quartile!of!patents!by!citation.!Overall,!the!centrality!values!are!correlated!with!citations,!but!show!significant!dispersion!beyond!them.!

Those!firms!with!smaller!portfolios!have!roughly!similar!average!centrality!to!those!with!larger!portfolios!(Figure!4).!One!might!have!expected!them!to!be!higher,!as!a!smaller!portfolio!should!require!a!greater!emphasis!on!highSquality!patents;!but!on!the!other!hand!larger!portfolios!may!be!associated!with!a!greater!opportunity!for!followSon!patenting,!which!would!tend!to!increase!centrality.!The!high!tail!among!largerSportfolio!firms!may!be!driven!by!the!fact!that!larger!portfolios!have!more!chances!to!get!outliers,!which!raise!the!average.!

Turning!to!specific!firms,!I!examine!some!pharmaceutical!firms!and!show!the!distribution!within!each!firm’s!portfolio.!(See!Figure!5.!These!figures!show!the!firm’s!overall!portfolio!across!time,!combined!without!any!discounting.)!Most!firms!are!close!to!the!median!of!zero,!with!some!unusual!cases.!Large!computer!hardware!and!software!firms,!on!the!other!hand,!have!higher!median!centrality!and!more!patents!in!the!tail!(Figure!6).!As!mentioned!above,!this!may!be!driven!by!citation!practices;!whether!a!technology!is!discrete!or!complex!may!also!play!a!role,!as!it!may!lead!to!greater!interScitation.!A!final!group!of!companies!in!various!other!industries!(Figure!7)!appear!to!have!some!characteristics!intermediate!between!those!of!ITC!and!pharmaceutical!firms.!

2.5.2 Market&saturation,&basicness,&and&value&The!effect!of!centrality!and!other!perSpatent!measurements!on!market!value!

can!be!evaluated!with!a!market!value!approach!that!is!due!to!Griliches!(1981),!and!used!with!changes!in!recent!papers!(Hall!&!MacGarvie,!2010).!Following!Hall!and!MacGarvie,!I!start!with!the!following!equation!for!the!market!value!of!firm!!!in!year!!:!

ln!!" = ! !!" ,!!" !where!!!"!indicates!physical!assets!and!!!"!knowledge!assets.!Knowledge!assets!are!not!observable!directly,!so!they!are!modeled!as!a!function!of!R&D,!patents,!citations,!and!centrality:!

!!" = ! !!" ,!!" ,!!"!!"

, !!"!!", !!"!!"

!where!!!"!indicates!R&D!stock,!!!"!indicates!patent!stock,!!!"!indicates!citation!stock,!and!!!"!and!!!"!indicate!centrality!stocks!of!PageRank!and!betweenness,!respectively.!The!citation!,!R&D,!patent,!and!centrality!stocks!are!all!calculated!as!sums!discounted!at!15%.!!

Following!Hall!and!MacGarvie,!I!then!use!a!firstSorder!logarithmic!expansion!to!produce!the!estimating!equation:!

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ln !!"!!"= ! ln !! + !!! ln!!" + !! ln

!!"!!"

+ !!! ln!!"!!"

+ !!! ln!!"!!"

+ !! ln!!"!!"

+ !! ln!!"!!"!

where!!!!is!a!year!effect.!This!equation!can!be!estimated!with!OLS.!Each!coefficient!measures!the!impact!of!the!respective!value.!The+market+value+regressions+are+reported+in+Table+6,+Table+7,+and++

Table+8.++

Table!8!shows!a!market!value!regression!with!centralities!included!in!the!regression.!These!results!are!consistent!with!the!hypothesis!that!centrality!indicates!a!saturation!effect.!They!show!a!positive!relationship!between!both!PageRank!and!betweenness!centrality!and!value!when!citations!are!excluded,!which!is!consistent!with!their!carrying!some!of!the!information!about!value!that!citations!themselves!carry.!When!citations!are!included!in!the!regression,!however,!both!relationships!become!negative.!These!are!consistent!with!the!prediction!that!centrality!relationships!are!related!to!basicness!and!holdup.!As+in+the+case+of+regressions+on+market+value,+R&D+stock,+and+citation+stock+(Hall+et+al.,+2005),+each+element+of+the+regression+adds+some+information+beyond+the+previous+one.+Columns+4+and+6+of++

Table!8!show!the!size!of!the!effect!of!centrality!changes!with!citations!held!constant:!a!10%!increase!in!PageRank!(per!citation)!leads!to!a!1.1%!decrease!in!value,!and!a!10%!decrease!in!betweenness!centrality!(per!citation)!leads!to!a!0.2%!decrease!in!value.!The!value!of!R&D!stock!per!assets!indicates!how!R&DSintense!a!particular!company!is,!and!similarly!the!citation!stock!per!R&D!stock!figure!can!be!interpreted!as!indicating!success!in!R&D.!The!centrality!per!citation!values,!similarly,!indicate!a!kind!of!importance!per!unit!of!R&D!success.!Focusing!on!the!change!in!PageRank,!for!instance,!one!can!interpret!an!increase!in!PageRank!per!citation!as!a!rise!in!how!close!a!patent!is!to!a!nexus!of!common!activity,!as!patents!with!higher!PageRank!are!more!frequently!cited!and!in!particular!more!frequently!cited!by!other!such!patents.!2.6 Conclusion&

NetworkSbased!approaches!can!add!significantly!to!the!information!extracted!from!a!citation!network!over!what!is!available!from!only!the!bibliographic!data!in!a!patent!under!observation!and!its!immediate!neighbors.!The!greatest!gain!comes!not!from!merely!improving!the!goodnessSofSfit!of!estimations!but!from!creating!new!tools!that!examine!aspects!of!the!patent!system!that!are!difficult!to!view!quantitatively,!such!as!patent!thickets!and!basicness.!The!evidence!is!consistent!with!centrality!scores,!betweeness!and!PageRank,!showing!a!measurement!of!basicness!and!holdup!effects.!

Two!specific!areas!appear!particularly!valuable!for!possible!future!investigation.!Further!testing!could!quantify!how!much!information!the!measurements!described!here!add!over!past!measures:!for!instance,!what!betweenness!centrality!adds!compared!to!the!generality!and!originality!scores!proposed!earlier!as!measures!of!basicness!(Trajtenberg!et!al.,!1997).!

In!addition,!network!approaches!may!be!useful!in!identifying!complimentary!and!substitute!patents.!This!would!have!practical!use!for!many!economic!analyses,!

! 24!

and!is!a!matter!that!now!requires!expert!examination!on!a!caseSbyScase!basis!to!resolve.!This!would!involve!further!study!of!how!citations!are!generated!and!how!they!differ!between!substitute!and!complimentary!patents,!and!could!have!significant!value!for!the!study!of!holdup!problems!in!the!patent!system.!

3 Network&Analysis&and&Patent&Pools&

3.1 Introduction&The!prior!chapter!contended!that!patent!citation!networks!contained!

substantial!information!not!previously!used!in!the!empirical!literature!that!used!patent!data,!and!specifically!discussed!ways!of!detecting!holdup!effects!in!publicly!owned!patents.!This!chapter!contains!further!exploration!of!network!measurements!of!holdup!effects!with!a!specific!focus!on!patent!pools.!

Patent!pools!are!one!tool!for!addressing!holdup!effects,!which!have!arisen!in!technologies!that!are!the!subject!of!collaborative!standardization!processes,!such!as!the!MPEGS2,!DVD,!and!3G!wireless!communication!standards.!They!arise!both!as!a!result!of!the!fact!that!these!standards!are!created!in!technical!areas!subject!to!multiple!competing!patents!and!from!the!standards!themselves,!as!the!standards!create!risks!of!holdup!due!to!multiple!participants!using!the!same!technology.!

Finding!holdup!problems!is!relevant!to!a!practical!problem!faced!by!antitrust!authorities.!Not!all!patent!pools!are!legal!under!the!antitrust!laws.!The!lawful!ones!typically!have!blocking!or!complementary!patents!and!solve!a!monopolistic!competition!or!holdup!problem.!Anticompetitive!pools!contain!substitute!patents!and!amount!to!cartels.!The!question!of!whether!this!can!be!detected!quantitatively!has!been!studied!before!to!only!a!limited!extent.!

Centrality!measures,!such!as!betweenness!centrality,!are!a!network!measurement!that!can!measure!aspects!of!a!patent’s!position!in!the!citation!network.!The!betweenness!centrality!of!a!specific!patent!of!interest!is!the!total!number!of!shortest!paths!from!one!patent!to!another!that!pass!through!the!patent!of!interest.!Intuitively,!it!indicates!how!well!connected!a!patent!is!by!citations!to!other!patents.!

I!show!that!betweenness!centrality!is!directly!related!to!whether!a!patented!invention!is!subject!to!substantial!holdup!problems,!decreasing!for!patents!with!greater!competing!claims!from!other!patents.!I!do!this!by!using!a!standardsSrelated!patent!pool,!the!MPEGS2!pool,!which!involves!patents!that!have!high!complementarities!and!so!are!subject!to!high!holdup!risks,!and!find!empirically!that!betweenness!centrality!is!lower!for!pool!patents!than!for!other!similar!patents.!!

3.2 Background&and&prior&literature&With!the!rise!of!large!and!complex!patent!ecosystems,!modern!patent!

licensing!practice!has!involved!crossSlicensing!of!patents!between!patentees!in!the!same!technological!area.!In!more!complex!deals,!these!deals!involve!patent!pools!in!which!patents!are!licensed!by!several!parties!to!one!entity,!which!relicenses!them.!The!entity!that!administers!the!relicensing!is!typically!either!a!special!entity!made!for!the!purpose!or!simply!one!of!the!patentees!acting!on!behalf!of!the!group.!Beyond!

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this,!pools!have!varying!characteristics:!Some!license!on!equal!terms!to!all!comers,!and!some!are!very!limited.!Some!are!(more!or!less)!formed!between!equals,!and!in!some!a!single!dominant!patentee!dictates!the!terms.!The!motivations!for!forming!the!pools!also!vary.!

One!motivation!for!forming!patent!pools!is!present!when!the!patents!are!complementary.!In!this!situation,!the!patents!form!an!example!of!the!Cournot!complements!problem!in!which!multiple!monopolists!collectively!raise!prices!above!even!the!monopolistic!optimum!level!(Shapiro,!2001).!This!problem!becomes!more!acute!when!holdup!concerns!are!higher,!as!in!modern!complex!technologies!where!cumulative!innovation!requires!a!series!of!steps!to!produce!an!innovation!capable!of!end!use!by!consumers,!each!of!them!potentially!patentable.!For!example,!in!modern!standardSsetting!environments,!multiple!competing!patentees!may!hold!patents!that!are!each!capable!of!blocking!the!practice!of!the!standard.!This!was!the!case!for!the!DVD!standard,!where!eight!electronics!firms!and!one!university!collectively!held!patents!related!to!video!compression!needed!to!make!DVD!players!or!recorders!(Anthony,!2000).!

In!such!a!situation,!implementers!of!the!standard!may!need!to!make!significant!investments,!such!as!tooling!factories,!in!order!to!implement!the!standard,!requiring!that!all!licensing!issues!be!addressed!efficiently!upSfront.!Where!only!two!patentees!are!present,!a!crossSlicense!of!each!party’s!patents!to!the!other!(possibly!with!royalty!payments!in!one!direction)!may!be!an!effective!way!to!solve!this!problem.!With!many,!a!central!arrangement!is!needed!for!practical!administrability.!

Both!crossSlicenses!and!pools!ensure!that!each!licensee!is!able!to!manufacture!the!product!(or!offer!the!service,!or!do!whatever!else!is!covered!by!the!patents)!with!a!single!license!from!the!pool.!For!technologies!such!as!the!DVD!video!compression!standard,!where!there!are!a!large!number!patentees!are!involved,!a!pool!license!may!be!the!only!practical!way!to!assure!manufacturers!that!they!will!be!able!to!use!the!invention.!This!solves!the!holdup!problem!that!would!otherwise!exist!where!one!entity!tried!to!negotiate!licenses!from!multiple!patentees!in!preparing!to!practice!the!standard!(Heller,!1998).!It!is!effective!where!industry!participants!know!in!advance!which!patents!are!relevant!to!a!particular!invention.!

Use!of!patent!pools!dates!to!before!the!antitrust!laws,!one!of!the!earliest!pool!technologies!being!sewing!machines!in!the!midS19th!century!(Clark,!Piccolo,!Stanton,!&!Tyson,!2000;!Lampe!&!Moser,!2010).!This!was!followed!by!other!patent!pools,!such!as!one!consisting!of!aircraft!manufacturers!established!at!the!government’s!request!in!1917!to!end!a!duopoly!in!aircraft!manufacturing.!

Once!the!antitrust!laws!were!passed,!patent!pools!raised!questions!under!them.!A!patent!pool!is!typically!a!horizontal!agreement!between!competitors,!and!royalties!to!the!pool!can!be!necessary!to!participate!in!a!market.!When!two!patents!between!them!cover!the!only!ways!of!accomplishing!a!goal,!their!owners!will!individually!have!an!incentive!to!compete!with!each!other!and!reduce!their!total!profit.!If!they!form!a!pool,!however,!they!may!form!a!single!monopoly!and!obtain!the!full!value!of!a!monopoly!on!the!mutual!object!of!their!patents.!This!can!amount!to!a!priceSfixing!agreement!where!the!competitors!reach!a!price!floor!to!the!detriment!of!consumers.!But!patent!pools!can!also!serve!as!a!market!tool!to!address!holdup!

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problems.!Antitrust!authorities!sometimes!allow!patent!pools!and!sometimes!do!not.!In!deciding!this,!a!fundamental!question!is!whether!patents!in!a!pool!are!compliments!or!substitutes.!Complimentary!patents!should!ideally!be!licensed!together!to!reduce!holdup!problems;!substitute!patents!should!be!separate!(Shapiro,!2001).!

Historically,!patent!pools!have!shown!both!procompetitive!and!anticompetitive!motivations,!and!the!response!of!antitrust!agencies!has!been!based!on!many!adShoc!considerations,!with!several!different!tools!applied!to!identify!whether!a!given!pool!is!procompetitive.!For!example,!whether!the!pool!prohibits!the!sale!of!unpatented!equivalents!has!been!considered,!along!with!whether!the!pool!prohibits!the!members!from!issuing!independent!licenses!for!the!patents!or!restricts!the!volume!produced!(Gilbert,!2004).!

After!the!creation!of!modern!antitrust!statutes,!the!first!way!they!were!applied!to!patent!pools!was!by!treating!patent!owners!as!entirely!free!to!license!their!rights!as!they!chose!(Gilbert,!2004).!This!pattern!was!later!reversed,!leading!in!the!midS20th!century!to!a!highly!restrictive!regime!in!which!many!pools!and!crossSlicensing!arrangements!were!invalidated.!In!1944,!a!pool!of!glass!manufacturers!that!dominated!the!glass!industry!lead!to!a!Supreme!Court!precedent!dissolving!the!pool!and!enabling!a!strict!level!of!regulation!of!patent!pools.!

At!a!high!point,!the!DOJ!identified!nine!practices!(the!“Nine!NoSNos”)!that!were!considered!highly!likely!to!harm!competition,!including!requiring!licenseSbacks!of!technology!improving!on!the!licensed!technology!and!setting!license!fees!independently!of!sales!volume!(Anthony,!2000).!Many!of!these!are!no!longer!automatically!considered!highly!likely!to!harm!competition.!For!example,!requiring!license!grantSbacks!is!recognized!as!procompetitive!in!certain!cases!under!the!government’s!Antitrust!Guidelines!for!the!Licensing!of!Intellectual!Property!(U.S.!Department!of!Justice!&!Federal!Trade!Commission,!1995),!especially!when!they!are!nonexclusive.!In!1977,!the!DOJ!(and!later!the!FTC)!began!giving!advisory!opinions!about!whether!a!particular!pool!was!procompetitive!(Gilbert,!2004).!

Which!ones!are!allowed!and!which!are!shut!down!is!in!many!ways!a!difficult!and!subjective!question.!According!to!the!Antitrust!Guidelines,!the!government!considers!crossSlicensing!and!pooling!to!be!sometimes!unlawful,!taking!into!account!whether!the!agreement!tends!to!lead!to!fixed!prices!or!output!limits!without!a!substantial!benefit!from!economic!integration.!The!Guidelines!also!raise!the!questions!of!whether!a!patent!pool!is!open!to!all!potential!licensors!or!limited,!and!whether!the!patent!pool!is!likely!to!reduce!the!incentive!of!each!pool!member!to!engage!in!R&D.!

StandardSsetting!pools!are!frequently!considered!procompetitive,!because!the!pools!exist!to!ensure!that!various!marketplace!participants!are!all!able!to!use!a!relevant!standard!of!general!applicability!without!holdup!problems!that!may!result!from!a!single!actor!using!its!patents!to!block!the!use!of!the!standard.!Guaranteeing!the!ability!to!practice!the!standard!allows!different!firms!to!compete!over!implementations—for!example,!to!all!make!players!capable!of!playing!the!same!video!discs—leading!to!procompetitive!effects.!

Several!recent!patent!pools!illustrate!the!modern!approach!to!judging!patent!pools.!The!MPEGS2!and!DVD!patent!pools!were!standardsSrelated!pools!that!

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consisted!of!patents!related!using!their!respective!standard,!and!the!PRK!patent!pool!was!an!arrangement!rejected!as!anticompetitive!between!two!companies!that!together!had!patents!covering!methods!of!laser!eye!surgery.!

A!key!aspect!of!the!MPEG!pool’s!design!was!a!review!for!technological!essentiality.!Each!patent!was!reviewed!by!an!independent!patent!expert!to!judge!whether!it!was!technically!essential!to!the!use!of!the!MPEG!standard.!Essentiality!could!be!challenged!by!pool!members!and!third!parties.!The!MPEG!patent!pool!also!required!grantSbacks!of!licenses!to!technology!developed!with!a!pool’s!patents!by!the!licensees,!had!an!independent!administrator!(which!could!reduce!the!chance!that!the!pool!enabled!sharing!of!information!in!an!anticompetitive!way),!and!allowed!patents!to!be!made!available!independently!of!the!pool.!These!factors!tended!to!favor!the!pool!being!found!allowable.!The!DVD!pool!was!designed!in!a!similar!manner,!including!patents!that!were!practically!necessary!for!compliance!with!the!DVD!standard!(U.S.!Department!of!Justice!&!Federal!Trade!Commission,!2007).!

The!PRK!pool,!in!contrast,!was!found!to!be!anticompetitive.!That!pool!involved!two!parties!that!were!the!only!firms!to!receive!marketing!approval!from!the!FDA!for!PRK!eye!surgery.!Each!of!the!two!parties!contributed!patents!and!was!a!licensee,!and!there!were!no!other!licensees.!In!addition,!the!two!abandoned!their!right!to!license!their!patents!separately,!and!each!party!had!a!veto!on!the!pool!licensing!to!anyone!else.!The!pool!charged!a!fee!to!each!of!the!two!members!for!performing!surgery.!The!FTC!found!that!under!the!circumstances!this!fee!amounted!to!an!illegal!price!floor!and!filed!suit,!leading!to!a!settlement!that!ended!the!pool.!

Considerations!of!the!sort!used!in!the!MPEG,!DVD,!and!PRK!pool!cases—procedural!considerations!about!how!a!pool!operates,!how!patents!are!allowed!in!or!rejected,!whether!there!are!thirdSparty!licenses,!and!whether!there!are!less!restrictive!means!for!enabling!the!practice!of!inventions—are!clearly!useful!in!understanding!whether!a!particular!pool!should!be!allowed,!since!they!are!informative!about!the!economic!bargain!struck!by!the!parties.!In!principle,!however,!whether!individual!patents!in!a!pool!are!complementary!or!substitutive!is!the!key!question!in!judging!whether!a!patent!pool!is!procompetitive.!Determining!whether!individual!patents!in!a!pool!are!actually!complementary!or!substitutive,!or!whether!they!are!likely!involved!in!a!patent!thicket,!may!be!more!difficult!than!looking!at!procedural!aspects!of!the!patent!pool!and!likely!to!require!some!extended!examination!of!each!individual!patent.!

At!least!two!previous!papers!attempted!to!judge!whether!a!set!of!patents!is!likely!to!have!thicket!effects!by!using!information!in!the!citation!structure!rather!than!looking!at!each!patent!in!detail.!One!of!them!was!about!thickets,!but!not!patent!pools.!Von!Graevenitz,!Wagner,!and!Harhoff!(2011),!in!studying!patent!thickets!in!complex!and!discrete!technologies,!developed!a!new!method!for!measuring!the!intensity!of!patent!thickets.!They!identified!triangles!in!which!one!firm!had!patent!applications!whose!search!reports!contained!X!or!Y!citations!to!patents!owned!by!two!other!firms,!each!of!which!had!patents!that!in!turn!had!such!citations!back!to!

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the!other!two!firms!in!the!triangle.14!The!number!of!such!triangles!was!a!measurement!of!how!substantial!packet!thickets!were!in!a!technological!area.!

The!other,!Clarkson!(2004),!used!a!similar!measurement,!the!network!density,!to!attempt!to!identify!patent!thickets.!Network!density!is!the!number!of!citations!present!in!a!patent!pool!divided!by!the!number!that!are!possible!if!each!patent!were!to!cite!to!each!patent!older!than!it.!He!tested!this!methodology!by!examining!how!it!rated!patents!in!the!MPEG!patent!pool,!which!was!likely!to!involve!holdup!problems,!and!the!PRK!pool,!which!was!opposed!by!the!DOJ!as!anticompetitive.!The!evidence!distinguished!patents!in!each!pool!from!similar!nonSpool!patents,!which!Clarkson!interpreted!as!indicating!there!were!potential!thicket!effects!in!both!the!MPEGS2!and!PRK!pools.!

Clarkson!tested!network!density!as!a!measurement!of!thickets!with!the!MPEG!and!PRK!patent!pools,!using!a!series!of!tStests!to!compare!the!density!of!the!patent!pool!to!the!density!in!each!comparison!group.!This!method!examined!only!citations!within!a!particular!set!of!patents.!When!examining!the!MPEG!pool,!it!considered!citations!between!MPEG!patents;!and!when!examining!a!different!set!it!examined!citations!between!them.!This!necessarily!limits!what!information!is!present!in!the!measurement,!and!what!kinds!of!questions!it!can!ask:!One!cannot!judge!whether!a!patent!is!probably!involved!in!a!large!area!of!overlapping!claims!that!include!patents!outside!the!pool.!Likewise,!it!is!difficult!to!judge!whether!a!patent!is!highly!foundational!in!the!overall!space!of!inventions.!

Outside!patent!thickets,!while!networkSbased!analyses!of!patent!citations!have!been!rare,!several!have!occurred.!In!the!legal!literature,!the!main!examination!of!patent!citation!networks!has!been!by!Katherine!Strandburg!and!several!coauthors!familiar!with!uses!of!networks!in!the!physical!sciences!(Strandburg!et!al.,!2006,!2008).!Noting!relatively!few!uses!of!network!science!in!law,!with!the!main!exceptions!being!a!small!number!of!studies!of!legal!case!citation!networks!(Chandler,!2005;!Smith,!2005),!they!examined!the!distribution!of!patent!citations!over!time.!They!compared!the!overall!structure!of!the!patent!citation!network!to!other!networks!on!several!measurements,!such!as!diameter,15!and!found!evidence!that!newer!patents!were!less!likely!to!be!cited!than!older!patents,!after!adjusting!for!age!and!other!factors,!and!suggested!this!was!evidence!of!a!change!in!patent!quality.!

In!the!economic!literature!Podolny!and!Stuart!(1995)!investigated!a!notion!of!technological!niches!using!ties!between!patents!that!cite!or!are!cited!by!a!given!patent.!Belenzon!(2006)!used!relationships!between!a!patent’s!child,!grandchild,!and!further!descendants!to!examine!knowledge!flows.!Measurements!of!spillovers!of!knowledge!from!one!company!to!another,!or!within!the!same!company,!appeared!related!to!value.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!14!X!and!Y!citations!are!added!by!the!examiner!in!the!European!Patent!Office,!and!indicate!a!basis!for!finding!invalidity.!15!The!diameter!of!the!network!is!the!length!of!the!longest!shortest!path!between!two!nodes.!In!other!words,!if!for!every!pair!of!nodes!S!and!T!in!a!network!one!calculates!the!shortest!path!from!S!to!T,!the!diameter!is!the!number!of!steps!in!the!longest!such!path.!

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Trajtenberg,!Henderson,!and!Jaffe!(1997)!attempted!to!measure!how!basic!or!appropriable!particular!inventions!are,!on!the!assumption!that!citations!indicated!ancestor!or!descendent!inventions.!For!example,!an!index!of!“importance,”!meant!to!measure!a!form!of!basicness,!was!based!on!citations!from!later!patents,!with!these!citations!themselves!weighted!by!importance!(and!with!a!discount!factor!to!cause!the!contribution!of!patents!distant!in!the!chain!to!drop!off).!An!index!of!“generality”!was!based!on!the!Herfindahl!index!of!citations!from!different!patent!classes.!To!measure!appropriability,!they!used!the!share!of!citations!coming!from!patents!awarded!to!the!same!inventor.!They!tested!these!metrics!by!comparing!university!and!corporate!patents,!and!found!that!university!patents!were!more!basic!and!less!appropriable!than!corporate!patents.!

Historical!research!from!times!before!antitrust!laws!or!when!they!more!loosely!regulated!pools!has!shown!that!patent!pools!can!directly!influence!innovation!incentives.!For!instance,!where!a!pool!maintained!control!over!sewing!machines!over!an!extended!period,!the!market!increased!innovation!in!inferior!substitutes,!because!competition!in!the!technology!of!the!pool!itself!was!restricted!(Lampe!&!Moser,!2009).!When!pools!freely!included!technologies!that!were!substitutes!for!each!other,!they!lead!to!a!reduction!in!innovation!in!related!technologies,!suggesting!that!the!pools!operated!to!reduce!incentives!to!competitively!invent!improvements!(Lampe!&!Moser,!2012).!

3.3 Analysis&Because!complementarities!are!significant!in!determining!whether!patent!

owners!benefit!from!combining!their!patents!in!a!pool,!interrelationships!between!patents!that!may!appear!in!the!citation!record!may!be!predictive!of!pool!membership.!The!following!section!discusses!aspects!of!citation!networks!that!should!be!related!to!presence!in!a!pool.!The!next!section!discusses!the!relationship!between!PageRank,!which!the!previous!chapter!contended!acts!as!a!measurement!of!market!saturation,!and!pool!membership.!

3.3.1 Pools&and&betweenness&centrality&

3.3.1.1 Patent/pools/and/citation/dynamics/As!described!above,!patent!pools!are!formed!for!a!variety!of!reasons.!This!

section!focuses!on!pools!that!are!formed!in!connection!with!standardSsetting!organizations.!These!patent!pools!provide!a!return!to!their!patent!owners!while!guaranteeing!participants!in!the!markets!that!rely!upon!their!respective!standards!the!ability!to!use!the!standardized!technology.!The!set!of!essential!patents!in!the!MPEGS2!patent!pool!is!a!representative!example!of!such!pools.!Focusing!on!standardSrelated!pools!is!instructive!because!they!are!a!significant!useScase!of!patent!pools!that!are!commonly!recognized!as!being!procompetitive!by!commenters.!

A!key!reason!for!this!is!that!when!industry!participants!all!use!a!single!technology,!they!can!become!vulnerable!to!being!sandbagged!by!unexpected!patent!claims.!This!issue!is!magnified!by!network!externalities!that!can!be!present!in!industries!that!use!standardized!technologies,!which!can!make!it!difficult!to!migrate!

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off!a!patented!technology!after!it!has!been!widely!adopted.!In!the!early!days!of!the!World!Wide!Web,!for!instance,!the!GIF!imageSfile!format!became!a!de!facto!standard!for!embedding!images!into!web!pages.!This!format!was!subject!to!a!patent!claim!by!Unisys!that!was!not!anticipated!by!the!creators!of!the!GIF!format,!and!that!only!became!prominent!after!many!market!participants!had!adopted!the!file!format.!

The!importance!of!avoiding!unexpected!patent!claims!from!industry!participants!is!particularly!significant!when!firms!simultaneously!have!IP!claims!in!the!technology!and!are!participating!in!standardSsetting!bodies.!A!firm!that!has!a!vote!on!a!standardization!committee!may!be!able!to!strategically!sway!a!standard!to!necessarily!fall!within!the!claims!of!a!patent!it!holds.!Two!notable!ways!that!standardSsetting!organizations!address!this!concern!are!through!disclosure!requirements!that!demand!a!committee!member!disclose!any!pertinent!claims!it!has!if!it!participates!in!a!standard!(with!any!lack!of!disclosure!likely!leading!to!the!patent!being!unenforceable!against!anyone!implementing!the!standard),!and!through!pledges!that!patents!will!be!licensed!under!reasonable!and!nondiscriminatory!(RAND)!or!fair,!reasonable,!and!nondiscriminatory!(FRAND)!terms.!

Even!if!SSO!participants!would!not!behave!strategically,!the!risk!of!unexpected!patent!claims!would!remain!a!significant!concern!for!implementers.!StandardSsetting!organizations!thus!often!require!a!RAND!guarantee!of!some!kind!from!participants!in!any!event.16!What!RAND!requires!is!not!always!clear!when!it!becomes!the!subject!of!an!exSpost!dispute;!some!courts!have!focused!on!a!hypothetical!negotiation!between!the!patentee!and!the!alleged!infringer!at!the!time!of!first!infringement,!with!attention!given!to!any!advantages!the!patented!technology!has!over!alternatives.!The!FTC!has!proposed!that!royalties!should!be!based!on!incremental!advantages!the!patent!has!over!alternative!technologies!at!the!time!the!standard!was!chosen.!

Whatever!level!of!royalties!is!compatible!with!a!RAND!commitment,!a!patent!pool!offers!certain!practical!advantages!in!meeting!the!commitment!where!there!are!multiple!patents!that!are!practically!essential!to!using!the!technology.!In!the!case!of!the!MPEGS2!standard,!for!instance,!a!significant!number!of!patents!were!all!technically!essential!to!using!the!standard.!A!RAND!commitment!can!address!the!holdup!problem!resulting!from!many!patents!being!necessary!to!use!a!standard,!but!may!do!so!imperfectly!(as!the!commitment!may!not!state!a!royalty!rate!up!front!and!such!commitments!have!been!subject!to!litigation).!A!pool!can!improve!on!that!commitment!both!by!better!assuring!implementers!that!they!will!be!able!to!use!the!technology!on!particular!terms,!and!by!reducing!the!administrative!costs!associated!with!obtaining!multiple!licenses.!The!pool!is!not!itself!a!substitute!for!a!RAND!commitment;!a!pool!that!did!not!have!any!obligations!to!license!at!reasonable!royalties!could!attempt!to!engage!in!holdup!to!increase!its!return.!To!prevent!this!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!16!Obviously,!this!cannot!provide!guarantees!against!nonparticipants!who!cannot!be!bound.!While!some!commenters!have!argued!for!extension!of!the!law!to!address!situations!where!a!nonparticipant!waits!quietly!to!assert!a!patent!after!the!market!develops!a!reliance!on!it!(Merges!&!Kuhn,!2009),!the!current!situation!is!that!standards!are!generally!at!risk!from!such!conduct.!

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and!enable!the!use!of!standards,!standardSrelated!pools!charge!negotiated!royalties!that!are!typically!set!as!part!of!the!pool!creation.17!

Because!RAND!commitments!can!be!met!through!nonSpool!licenses!and!joining!a!pool!is!voluntary!for!standards!participants,!some!patentees!may!choose!not!to!join!pools.!For!instance,!in!the!MPEGS2!pool!Lucent!chose!to!remain!outside!and!license!its!patents!separately.18!In!another!example,!firms!involved!in!the!DVD!standard!negotiations!were!unable!to!reach!terms!that!satisfied!all!parties,!resulting!in!two!separate!patent!pools!being!created.!An!important!aspect!of!pool!negotiations!is!dividing!royalties!between!patentees.!Many!pools!have!chosen!a!numerical!proportionality!rule,!dividing!royalties!by!the!number!of!patents!(perhaps!adjusted!by!the!number!of!countries!in!which!the!patents!are!in!force),!while!a!few!attempt!to!estimate!the!value!of!the!covered!patents!by!some!method!(LayneSFarrar!&!Lerner,!2011).!

A!greater!effect!on!the!composition!of!pools,!however,!is!the!requirement!of!essentiality.!As!section!2!explained,!standardsSrelated!patent!pools!have!antitrust!requirements!that!patents!involved!be!essential!to!the!practice!of!the!standard!in!some!form.!These!requirements,!along!with!the!fact!that!pool!participation!is!more!common!than!separate!licensing,!mean!that!technical!essentiality!is!necessary!for!a!patent!to!be!present!in!a!pool.!

For!many!patents!to!be!essential!to!practicing!a!standard,!they!must!all!cover!the!same!device!or!(or!a!small!number!of!devices,!like!DVD!recorders!and!players,!that!are!all!related!through!the!standard).!This!means!that!there!are!necessarily!complementarities!between!the!patents!and,!in!the!absence!of!a!patent!pool!or!other!coordinating!mechanism,!an!economic!holdup!risk.!

This!complementarity!and!the!attendant!potential!holdup!effect!is!something!that!may!affect!observable!aspects!of!the!patents!in!their!part!of!the!citation!network.!When!multiple!patents!are!necessary!to!use!a!single!device,!then!claims!of!each!patent!must!cover!the!device.!This!similarity!between!claims!of!different!patents!may!indicate!actual!technological!evolution!from!one!patent!to!another,!but!not!necessarily;!a!patent!may!be!similar!to!another!merely!because!two!inventors!operated!in!the!same!space!without!necessarily!learning!from!each!other.!Whatever!the!reason!the!claims!cover!the!same!embodiment,!the!similarity!in!claims!may!lead!to!citations,!as!patent!applicants!are!required!to!report!all!relevant!prior!art!they!are!aware!of,!and!examiners!regularly!cite!prior!art!in!their!responses!to!patent!applications,!based!on!their!knowledge!of!what!art!is!relevant!to!narrow!a!claim.!One!should!therefore!expect!that!the!number!citations!between!two!patents!is!positively!related!to!the!likelihood!that!the!two!cover!the!same!embodiment.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!17!For!instance,!the!MPEGS2!pool!reported!a!royalty!of!$4!per!product!shipped!to!the!DOJ!when!requesting!review,!with!some!limited!flexibility!to!increase!or!decrease!the!royalty.!18!Lucent!found!it!so!preferable!to!remain!outside!the!pool!that!it!attempted!to!keep!its!own!patents!outside!through!a!trust!even!when!it!merged!with!Alcatel,!which!was!already!a!member!of!the!pool.!Litigation!resulting!from!Alcatel’s!earlier!commitment!to!license!through!the!pool!eventually!forced!the!Lucent!patents!into!the!pool.!

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For!example,!consider!a!DVD!player!where!three!patents!A,!B,!and!C!all!are!necessary!to!manufacture!the!player.!Since!claims!of!each!patent!cover!the!device,!the!claims!of!any!two!of!the!three!patents!are!more!similar!to!each!other!than!they!would!be!to!a!fourth!patent!D!not!necessary!to!manufacture!the!player.!The!analysis!above!allows!a!conclusion!that!it!is!more!likely!that!there!will!be!a!citation!between!A!and!B!than!between!A!and!D.!(In!patent!networks,!citations!always!proceed!from!newer!patents!to!older!patents;!but!for!present!purposes,!the!direction!of!the!citation!is!not!important!because!I!only!use!it!as!an!indication!of!similarity!between!patents.)!Furthermore,!more!citations!between!patents!will!generally!lead!to!shorter!(more!direct)!citation!paths!from!one!patent!to!another:!if!citations!are!relatively!infrequent,!a!connected!path!from!patent!A!to!B!to!C!may!exist!without!a!shorter!path!from!A!to!C,!but!where!they!are!relatively!frequent,!it!will!be!more!likely!for!there!to!be!a!direct!citation!between!A!and!C.!In!general,!then,!a!citation!path!from!one!patent!to!another!in!or!near!a!set!of!interlocking!patents!essential!to!using!a!certain!technology!should!be!more!direct!than!paths!between!other!similar!patents!that!are!not!in!a!closely!interlocking!set.!

Other!similar!patents!may!cite!to!or!from!patents!with!high!complementarities!between!them!without!themselves!having!high!complementarities!with!other!patents.!For!example,!a!patent!might!be!cited!by!several!patents!in!a!pool!without!itself!covering!the!standardized!technology;!it!may!be!in!a!related!field,!may!indicate!background!research,!or!be!an!alternative!that!was!not!standardized.!

To!summarize!the!discussion!so!far,!where!a!patent!pool!is!associated!with!a!standardized!technology,!an!essentiality!decision!must!be!made!that!(at!least!if!it!is!honest)!means!there!must!be!several!patents!that!collectively!cover!the!technology!in!an!interlocking!manner!so!that!practicing!it!requires!all!of!them.!The!improvements!represented!by!the!patents!have!greater!value!when!practiced!together!due!to!the!value!of!the!technology!(as!demonstrated!by!the!fact!that!it!was!a!candidate!for!standardization).!This!should!be!consistent!with!a!denser!citation!network!than!for!other!similar!patents!that!may!relate!to!the!technology!without!being!essential.!

While!these!remarks!apply!to!standardSsetting!pools,!they!do!not!apply!to!all!standardSsetting!environments!or!to!all!patent!pools.!In!the!case!where!there!is!a!standard!but!there!are!not!multiple!patent!claimants,!a!unilateral!RAND!or!FRAND!requirement!may!be!the!means!by!which!a!standardSsetting!organization!addresses!fears!of!holdup!after!standard!implementation.!Likewise!there!are!patent!pools!that!may!be!created!where!the!patents!are!not!complementary,!as!the!review!of!antitrust!history!above!makes!clear.!

3.3.1.2 Quantitative/estimation/of/overlapping/claims/with/betweenness/centrality/Having!explained!that!patent!citations!are!denser!and!citation!paths!shorter!

when!patent!claims!are!overlapping,!I!turn!attention!now!to!means!of!estimating!this!effect!quantitatively.!

“Betweenness!centrality”!is!a!measurement!of!nodes!in!a!network!defined!roughly!as!the!fraction!of!shortest!paths!between!two!nodes!that!a!given!node!is!on.!More!precisely,!for!a!patent!A!its!betweenness!centrality!is!the!number!of!pairs!of!

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patents!B!and!C!each!different!from!A!(and!different!from!each!other)!for!which!the!shortest!path!from!B!to!C!passes!through!A.!Where!there!are!multiple!equally!short!paths!from!B!to!C,!each!contributes!a!proportional!fraction!to!the!betweenness!centrality!of!A.!(The!previous!chapter!discusses!betweenness!and!other!network!concepts!further.)!Note!that!where!the!shortest!path!is!a!single!citation!between!B!and!C,!it!doesn’t!contribute!to!the!betweenness!of!any!patent,!including!B!and!C,!due!to!the!requirement!that!B!and!C!each!be!different!from!A.!

This!quantity!is!related!to!how!interconnected!nearby!patents!are.!Consider!four!patents!A,!B,!C,!and!D!that!are!all!directly!connected!by!citations.!The!betweenness!for!each!will!be!zero,!setting!aside!any!other!patents!in!the!network,!because!for!every!pair!of!patents!the!shortest!path!between!them!is!the!citation!between!them.!

A!decrease!in!the!probability!of!citations!between!patents!will!raise!their!betweenness.!For!instance,!if!the!four!patents!contained!citations!in!order,!A!to!B!to!C!to!D,!then!B!and!C!would!each!be!on!two!shortest!paths!(B!being!on!the!shortest!path!from!A!to!C!and!A!to!D,!and!C!on!the!shortest!path!from!A!to!D!and!B!to!D).!This!is!higher!than!the!zero!that!results!when!they!are!all!connected!directly.!

For!networks!that!are!sparser,!this!remains!the!case.!If!there!is!a!path,!not!necessarily!a!single!step,!from!A!to!B,!and!from!B!to!C,!then!adding!more!citations!between!patents!near!each!other!will!raise!the!likelihood!of!there!being!a!short!path!from!A!to!C,!possibly!through!intermediaries,!that!does!not!involve!B.!

The!betweenness!of!a!patent!potentially!depends!on!patents!in!the!network!further!away,!as!well.!Consider!a!small!group!of!patents!in!the!overall!patent!citation!network,!which!are!interconnected!with!each!other!at!least!to!some!extent!(for!instance,!because!they!have!related!subject!matter),!and!consider!relatively!distant!patents!S!and!T!for!which!the!shortest!path!necessarily!passes!through!the!group.!This!shortest!path!contributes!to!the!betweenness!centrality!of!patents!in!the!group.!

How!does!its!contribution!depend!on!the!density!of!citations!within!the!group?!Each!node!along!a!shortest!path!from!S!to!T!receives!a!unit!of!betweenness!centrality!from!being!on!that!path.!But!adding!citations!within!the!group!will!often!shorten!the!length!of!the!shortest!path!through!the!group,!because!either!an!additional!citation!can!be!ignored!(it!is!not!on!a!shortest!path!through!the!group)!or!it!operates!as!a!shortcut!(for!example,!it!connects!A!to!C!where!the!shortest!path!through!the!group!previously!went!from!A!to!B!to!C).!This!reduces!the!number!of!patents!that!are!on!the!shortest!path,!reducing!the!overall!contribution!that!the!path!from!S!to!T!makes!to!the!group’s!average!betweenness!centrality.!Thus!a!greater!citation!frequency!within!the!small!group!can!reduce!the!average!betweenness!centrality!of!the!group’s!members.!

Here,!adding!citations!within!the!group!may!either!decrease!or!increase!the!number!of!distinct!equally!short!paths!from!S!to!T.!But!this!factor!does!not!affect!betweenness!because!when!there!are!several!paths!each!path!only!contributes!a!proportional!fraction!to!the!centrality!of!the!patents!along!the!way.!

For!these!reasons,!a!greater!likelihood!of!citation!can!be!related!to!lower!betweenness.!Combined!with!the!assumption!that!citation!is!more!likely!between!patents!that!cover!the!same!embodiments,!this!mean!that!a!patent!may!have!lower!betweenness!where!it!has!more!other!patents!that!cover!the!same!embodiment.!To!

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the!extent!that!covering!the!same!item!with!multiple!patents!is!indicative!of!many!patents!being!essential!to!practice!a!technology,!one!should!expect!to!see!essential!patents!to!have!lower!betweenness!than!other!similar!patents!that!are!not!essential.!

3.3.1.3 Betweenness/and/basicness/This!section!turns!to!another!window!onto!the!significance!of!betweenness!

centrality!that!gives!some!further!support!for!the!proposition!that!standardsSpool!patents!should!have!lower!betweenness!than!other!similar!patents.!A!previously!studied!aspect!of!patents!is!basicness.!Basicness!is!intuitively!used!to!refer!to!whether!an!invention!is!more!fundamental!or!more!applied;!as!Trajtenberg,!Henderson,!and!Jaffe!(1997)!put!it,!basicness!consists!of!“fundamental!features!of!innovations!such!as!originality,!closeness!to!science,!brea[d]th,!etc.!that!impinge!on!the!incentives!to!engage!in!R&D!and!on!the!choice!of!research!projects.”!Trajtenberg!et!al.!identified!several!measurements!that!they!hypothesized!should!be!related!to!originality,!generality,!and!other!aspects!of!basicness.!For!example,!patents!characterized!by!leading!to!multiple!different!strains!of!research!would!leave!evidence!of!this!in!the!citation!record!in!the!form!of!receiving!citations!from!multiple!different!patent!classes.!The!more!distinct!patent!classes!related!in!this!way!(as!measured!by!a!HerfindahlSHirschman!concentration!index!on!the!number!of!patent!classes!of!citing!patents),!the!more!the!patent!is!relevant!to!different!subject!matters.!

Betweenness!likewise!measures!fundamental!features!of!innovation!that!may!include!aspects!of!basicness.!The!most!between!patents!act!like!bridges:!they!are!on!the!way!from!one!cluster!of!patents!to!another!cluster,!and!so!tie!together!different!forms!of!research.!For!example,!a!patent!that!leads!to!two!fields!that!are!clearly!distinct!in!their!own!right,!each!producing!many!patents!without!many!ties!between!them,!may!be!a!foundational!piece!of!work!that!was!applied!in!two!different!ways.!This!may!make!it!highly!valuable!(if!it!can!block!use!of!multiple!technologies),!but!not!necessarily!(basic!patents!may!represent!“pure”!research!that!is!not!commercially!viable,!or!that!is!not!effectively!enforceable!against!unexpected!applications!of!it).!

This!version!of!basicness!is!not!necessarily!equivalent!to!any!particular!past!measurement!of!basicness,!such!as!the!measurements!of!originality!and!generality!identified!by!Trajtenberg!et!al.!However,!some!structural!similarities!are!present:!Where!a!patent!had!high!originality,!it!combined!multiple!distinct!fields!into!a!single!invention;!likewise,!a!patent!with!higher!betweenness!has!connections!to!distinct!parts!of!the!patent!universe!that!infrequently!contact!each!other.!

Such!foundational!patents!contrast!with!less!foundational!inventions!that!refine!existing!ideas!without!leading!to!independent!strains!of!research.!In!the!case!of!standards!pools,!multiple!patents!cover!the!same!invention.!These!are!necessarily!less!foundational,!both!because!standardization!comes!at!a!relatively!mature!part!of!technological!evolution!and!because!for!a!pool!to!be!needed!patents!will!tend!to!build!off!each!other!or!related!innovations.!

A!final!aspect!of!basicness!and!pools!concerns!the!incentives!of!actors!involved.!While!some!fundamental!inventions!may!be!less!applied!and!less!appropriable,!some!others!may!be!very!enforceable!against!multiple!lines!of!work.!

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In!the!typical!case,!patent!pool!compensation!rules!mean!that!participants!will!avoid!contributing!patents!that!are!more!valuable!on!their!own,!that!have!significant!independent!value,!and!need!not!be!used!with!other!patents!to!have!value.!This!is!particularly!true!when!the!compensation!rules!require!that!each!patent!receive!the!same!royalty!share.!

When!considering!whether!basicness!is!a!significant!aspect!of!whether!patents!is!likely!to!be!standardized,!it’s!important!to!distinguish!between!patents!and!technologies!that!group!many!patents.!A!technology!like!MPEGS2!may!be!very!basic!in!its!own!right,!in!the!sense!that!many!products!and!services!will!build!off!it.!However,!when!the!technology!is!spread!across!many!patents!no!one!of!them!can!be!reasonably!described!as!a!basic!invention.!When!a!single!patent!is!basic,!on!the!other!hand,!it!may!lead!to!many!followSup!technologies!while!not!being!subject!to!the!kinds!of!competing!claims!that!lead!to!patent!pools.!

3.3.1.4 Summary/This!section!explained!why!patents!that!are!highly!likely!to!cover!the!same!

embodiments!as!other!related!patents!are!likely!to!be!in!denser!citation!sections,!and!that!this!should!affect!network!betweenness!measurements.!The!last!subsection!described!some!additional!reasons!why!betweenness!should!be!negatively!associated!with!pool!membership.!!

In!the!case!of!standardsSrelated!patent!pools,!this!implies!that!patents!present!in!in!the!pool!should!have!lower!betweenness,!as!long!as!judgments!of!patent!essentiality!are!accurate.!The!same!does!not!necessarily!apply!to!pools!that!are!formed!for!other!reasons,!such!as!to!establish!an!anticompetitive!relationship.!I!summarize!this!in!the!following!hypothesis:!1. Betweenness.centrality,.all.else.equal,.is.negatively.associated.with.presence.in.a.

standards(setting.patent.pool..

3.3.2 Pools&and&saturation&This!section!relates!the!previous!chapter’s!measurements!of!possible!

saturation!effects!to!patent!pools.!The!previous!chapter!calculated!several!measures!of!patents,!including!betweenness!and!PageRank,!and!measured!their!effect!on!patent!value!using!publicScompany!data!and!a!market!value!analysis.!It!found!that!an!increase!in!the!PageRank!of!a!patent!was!related!to!a!decrease!in!the!value!of!the!patent,!after!adjusting!for!citations,!and!interpreted!this!as!a!market!saturation!or!thicket!effect!in!which!patents!had!lower!value!due!to!the!presence!of!competing!claims!that!needed!to!be!satisfied!in!order!to!for!the!owner!to!use!the!patented!invention!(or,!equivalently,!that!competed!with!the!royalties!the!patent!owner!sought!from!practicing!entities).!

Patent!pool!composition!data!provide!an!additional!way!to!test!this!claim!beyond!that!allowed!by!market!value!data,!because!patent!pools!are!a!natural!tool!for!reducing!holdup!costs.!If!patent!pools!are!created!in!part!to!solve!thicket!or!holdup!problems,!then!they!should!contain!patents!whose!values!are!diminished!by!

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that!saturation.19!If!PageRank!is!predictive!of!saturation!(for!equally!cited!patents),!it!should!be!higher!for!patents!in!the!pool;!and,!if!so,!this!would!provide!evidence!that!PageRank!is!associated!with!the!presence!of!a!thicket!effect.!For!instance,!if!PageRank!tends!to!detect!stockpiling!behavior!designed!to!maintain!a!threat!of!litigation!against!competitors,!the!patents!with!higher!PageRank!would!necessarily!have!a!greater!need!to!be!practiced!in!combination!with!other!patents.!

The!test!here!differs!from!the!examination!of!betweenness!centrality!in!the!previous!section.!The!focus!there!is!only!on!essentiality:!that!many!patents!are!needed!to!practice!a!technology!(or!at!least!a!certain!form!of!a!technology).!Essentiality!to!practice!a!standardized!technology!is!not!necessarily!indicative!of!the!market!value!of!a!patent!in!the!same!way!that!a!true!thicket!or!anticommons!effect!does,!because!thicket!effects!reduce!the!value!of!a!patent!and!patents!that!are!essential!to!the!practice!of!a!standardized!technology!may!nevertheless!have!additional!valuable!uses!outside!the!standardized!technology.!

Taken!together,!holdup!effects!should!be!greater!for!patents!in!more!saturated!markets,!and!should!lead!to!patent!pool!formation.!This!leads!to!the!following!hypothesis.!2. Patents.less.valuable.due.to.market.saturation,.as.measured.by.PageRank.

centrality.and.citations,.are.more.likely.to.be.present.in.patent.pools..

3.4 Data&and&results&

3.4.1 Patent&pools&and&creating&comparison&sets&Two!principal!data!sources!are!used!in!the!empirical!tests!discussed!below.!

First,!I!obtained!data!on!patents!and!citations!from!the!NBER!patent!data!project.!This!data!file!contains!cleaned!information!on!patent!bibliographic!information,!including!citations,!assignees,!and!classifications.!It!also!includes!its!own!classification!of!patents!into!technological!categories!and!subcategories!(Hall!et!al.,!2001).!These!categories!are!based!on,!but!broader!than,!the!US!patent!classification!system!classes.!

I!also!derived!data!on!which!patents!were!part!of!the!MPEGS2!patent!pool!from!records!on!the!MPEGSLA!web!site.!MPEGSLA!is!the!administrator!for!the!patent!pool.!The!list!contains!over!one!thousand!total!international!patents,!of!which!147!are!issued!by!the!United!States.!Of!these!147,!96!patents!are!in!the!sample!covered!by!the!NBER!patent!data!project.!(Fourteen!of!the!147!are!reissue!patents!not!covered!by!the!patent!data!project,!and!the!remaining!thirtySseven!are!outside!the!patent!data!project’s!sample!period.)!The!class!and!grant!year!distributions!of!these!96!are!shown!in!Table!9!and!Table!10.!MPEGS2!is!a!video!compression!standard!that!draws!several!different!areas!in!communications,!signal!processing,!and!related!technologies.!The!largest!owners!of!pool!patents!include!Sony,!Mitsubishi,!North!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!19!Any!specific!patent!may!gain!from!being!able!to!hold!up!the!use!of!the!standard,!but!this!is!not!the!case!for!all!the!patents!involved!in!the!situation—in!the!Cournot!complements!problem,!which!these!kinds!of!holdup!problems!are!an!example!of,!the!private!value!of!the!monopolies!is!less!when!they!are!held!in!separate!hands!than!when!they!are!in!common!hands.!

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American!Philips,!Toshiba,!and!General!Electric.!There!are!103!intraSpool!citations!among!the!96!pool!members!and!3,489!total!citations!involving!pool!members.!

In!order!to!create!groups!for!comparison,!I!created!six!nested!nearby!patent!universes!each!containing!a!larger!group!of!patents!surrounding!the!MPEGS2!pool!members.!The!method!was!based!on!that!used!by!Clarkson!(2004).!The!innermost!one!(Universe!1!on!Table!11)!contains!patents!that!cited!or!were!cited!by!patents!in!the!MPEG!pool,!and!that!were!in!the!set!of!U.S.!patent!classes!that!MPEGS2!pool!members!were!in!(see!Table!9!and!Table!11).!This!group!and!the!others!were!also!restricted!by!year!to!the!years!pool!patents!were!granted.!Two!larger!nested!universes!(Universe!2!and!3)!were!created!by!restricting!not!by!U.S.!patent!class!but!by!the!technological!subcategory!and!category!used!by!the!NBER!Patent!Data!Project.!Three!more!(Universes!4!through!6)!were!created!in!a!similar!fashion,!but!dropping!the!restriction!that!these!comparison!patents!cite!or!be!cited!by!the!patent!pool.!

3.4.2 Measures&and&descriptive&results&The!estimates!of!betweenness!centrality!and!PageRank!centrality!were!

created!and!described!in!detail!in!the!previous!chapter.!PageRank,!which!can!be!thought!of!as!the!probability!that!a!particular!kind!of!random!linkSwalking!agent!that!passes!from!one!patent!to!the!next!by!following!citations!and!occasionally!jumps!to!a!random!patent,!is!estimated!with!a!linkSwalking!simulation.!Betweenness!is!estimated!with!an!algorithm!that!is!designed!for!sparse!networks!such!as!social!networks!in!which,!for!any!node!in!the!network,!the!number!of!links!to!or!from!it!is!significantly!lower!than!the!number!nodes!in!the!network!(Brandes,!2001).!Both!PageRank!and!betweenness!centrality!differ!by!patent!year,!due!to!the!fact!that!patents!early!in!the!citation!history!have!few!places!they!can!cite!and!patents!later!are!cited!by!few.!This!effect!is!adjusted!for!by!normalizing!each!measurement!using!the!median!for!the!year.!See!chapter!1!for!additional!statistics!including!the!betweenness!and!PageRank!values!before!normalization.!

The!raw!value!of!PageRank!is!a!small!number,!reflecting!the!fact!that!it!can!be!regarded!as!the!probability!of!landing!on!a!page;!betweenness!can!be!quite!large,!because!a!large!number!of!distant!pairs!of!patents!may!have!their!shortest!paths!pass!through!a!component!of!the!network.!

Both!values,!like!citation!counts!themselves,!tend!to!have!some!very!large!values!for!a!small!set!of!patents,!reflecting!the!tendency!of!patents!to!have!a!skewed!value!distribution!in!many!regards.!Table!12!shows!descriptive!statistics!of!logarithms!of!these!variables!across!the!MPEGS2!pool!and!several!comparison!groups.!

3.4.3 Empirical&analysis&I!tested!whether!patents!in!the!pool!were!likely!to!have!lower!betweenness!

by!two!methods.!I!first!present!a!tStest!of!whether!betweenness!differs!between!pool!patents!and!members!of!the!nested!universes!defined!in!section!3.4.1!above.!Second,!I!used!a!probit!regression!on!whether!a!patent!was!present!in!the!pool!compared!to!other!nearby!patents.!I!then!present!a!similar!analysis!of!PageRank.!

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Table!13!shows!the!tStest!results!for!reference.!For!the!first!three!universes,!betweenness!is!smaller!for!patents!in!the!pool;!for!the!first!universe!the!sample!size!is!too!small!to!reject!the!null!hypothesis!of!no!difference.!In!the!remaining!three!the!pool!has!larger!betweenness!than!patents!outside!the!pool.!PageRank!was!consistently!larger!in!the!pool!than!outside.!

A!KruskalSWallis!equalitySofSpopulations!rank!test,!not!shown!on!the!table,!did!not!reject!the!hypothesis!that!the!betweenness!and!PageRank!distributions!between!the!pool!and!the!universes!were!identical,!but!merely!shifted!in!mean.!This!is!consistent!with!a!number!of!possible!mechanisms,!including!that!pool!membership!picks!up!an!effect!that!adds!to!a!number!of!other!impacts!on!betweenness!without!changing!!other!aspects!of!patents!that!determine!centrality.!In!the!probit!model,!the!explanatory!variables!were!log!citations!and!log!betweenness!or!log!PageRank!centrality.!The!dependent!variable!was!an!indicator!variable!for!whether!the!patent!was!in!one!of!the!pools.!The!control!variables!were!indicator!variables!for!the!year!of!issuance!and!for!the!HJT!technological!subcategory.!

Table!14,!columns!1S3!show!the!probit!regressions!three!patent!universes!composed!of!patents!citing!to!or!cited!by!the!pool!patents.!In!these!samples,!betweenness!centrality!is!negatively!associated!with!presence!in!the!pool.!In!the!other!three!universes,!the!betweenness!coefficient!is!not!significantly!different!from!zero.!

These!results!indicate!that!for!patents!closely!related!to!the!relevant!technological!space—which!can!be!viewed!as!possible!substitutes!or!alternative!candidates!for!inclusion!in!the!pool—more!between!patents!are!less!likely!to!be!present!in!the!pool.!This!is!consistent!with!the!interpretation!of!betweenness!as!an!indication!of!basicness!of!section!3.3.1.3.!In!terms!of!magnitude!of!effect,!at!the!mean!value!of!citations!for!patents!in!the!computers!and!communications!category,!a!oneSstandard!deviation!increase!in!log!betweenness!corresponds!to!a!135%!increase!in!probability!of!inclusion!in!the!pool.!This!is!consistent!with!hypothesis!1.!When!the!set!of!patents!under!consideration!is!much!broader,!including!patents!that!likely!differ!in!significant!other!ways!from!the!pool!member!patents,!the!pool!patents!are!not!necessarily!different!from!the!average!patent.!

Table!15!shows!the!corresponding!results!for!log!PageRank.!PageRank!is!positively!associated!with!presence!in!the!pool,!but!is!not!significantly!different!from!zero!in!the!first!three!regressions.!These!do!not!provide!significant!support!or!rebuttal!to!hypothesis!2.!Table!16!shows!the!results!when!log!PageRank!and!log!betweenness!are!both!included.!In!this!regression,!the!signs!and!significance!levels!of!the!PageRank!and!betweenness!coefficients!remain!the!same!as!in!the!prior!two!tables,!with!a!few!exceptions!(the!significance!level!of!betweenness!in!column!4,!and!the!sign!of!the!(nonSsignificant!and!near!zero)!betweenness!coefficient!in!column!6).!The!most!noticeable!difference!is!between!this!table!and!the!prior!table!in!the!PageRank!coefficients!for!the!first!three!columns,!which!significantly!increase!in!magnitude.!On!the!whole,!these!results!appear!to!suggest!that!betweenness!and!PageRank!are!measuring!different!aspects!of!the!pool!patents’!attributes.!

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3.4.4 The&PRK&pool&In!Table!17,!a!similar!regression!on!the!PRK!patent!pool!is!explored.!There!

were!25!patents!in!the!PRK!pool,!which!are!be!identified!in!the!FTC!complaint!against!the!pool.!All!25!were!in!the!period!covered!by!the!NBER!patent!data!project.!

The!universes!for!the!PRK!pool!were!generated!by!a!similar!process!to!the!MPEG!pool!universes.!The!first!universe!were!generated!by!selecting!patents!citing!to!or!from!the!PRK!pool,!in!the!relevant!time!period!(1987!to!1995),!and!in!class!351!(Optics:!eye!examining,!vision!testing!and!correcting)!or!606!(surgery).!The!next!one!was!similar,!but!replacing!the!class!limitation!with!HJT!technological!subcategories!32!or!39,!and!the!third!universe!likewise!with!all!of!HJT!category!3!(drugs!and!medical).!Three!more!universes!were!defined!similarly,!removing!the!requirement!of!citation!to!or!from!the!pool.!

The!regression!results!show!that!the!MPEG!and!PRK!pools!are!probably!not!distinguishable!by!their!betweenness!and!PageRank.!Betweenness!is!negatively!related!to!pool!membership!for!the!PRK!pool,!like!the!MPEG!pool.!This!is!consistent!with!Clarkson’s!result,!which!similarly!showed!that!the!MPEG!and!PRK!pool!had!similar!properties!according!to!his!measurements!(Clarkson,!2004).!

There!is!one!possible!difference!in!universes!four,!five,!and!six,!which!is!the!lower!impact!of!PageRank!on!pool!membership!in!the!PRK!pool!than!the!MPEG!pool!(the!size!of!the!impact!of!PageRank!is!smaller!and!not!significant).!This!is!suggestive!that!an!investigation!that!focused!more!heavily!on!PageRank!and!on!comparison!groups!that!did!not!cite!to!or!from!the!patent!pool!could!be!a!useful!avenue!for!later!research.!Since!those!last!three!universes!are!not!limited!to!patents!that!cite!to!or!from!the!patent!pool,!they!are!likely!to!have!patents!that!are!less!comparable!to!the!pool!patents!in!several!ways.!A!possible!explanation!is!that!PageRank!may!be!picking!up!technological!differences!between!the!MPEG!and!PRK!pool:!video!compression!exists!in!a!complex!technology!that!has!substantial!cumulative!inventions,!while!laser!eye!surgery!technology!may!have!more!discrete!innovations!that!are!less!connected!to!each!other.!

3.5 Conclusion&This!chapter!detected!evidence!of!betweenness!centrality!being!lower!for!

patents!with!more!overlapping!claims!with!other!related!patents.!Evidence!was!unclear!on!the!hypothesis!of!the!prior!chapter!that!PageRank!is!associated!with!thicket!effects.!

The!methods!studied!here!have!possible!advantages!over!other!tools!that!bear!useful!further!study.!Among!other!possible!methods!of!detecting!holdup,!such!as!use!of!triples!of!blocking!firms!and!network!density!measurements,!betweenness!centrality!has!a!possible!advantage!in!that!it!works!at!the!patent!level!rather!than!at!the!firm!or!pool!level.!Other!methods!may!be!more!capable!of!detecting!whether!a!firm!is!in!an!area!where!thickets!are!an!issue,!or!whether!a!set!of!patents!involves!probable!overlap!between!them,!but!may!be!less!capable!of!estimating!the!effect!for!particular!patents.!

Other!advantages!that!networkSbased!measurements!have!over!various!other!patent!metrics!are!reducing!sensitivity!to!classification!choice!and!using!patent!data!beyond!immediately!adjacent!patents;!other!measures!like!the!

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originality!and!generality!of!Trajtenberg,!Henderson,!and!Jaffe,!for!instance,!are!dependent!on!the!classification!system!used!and!factor!in!immediately!adjacent!patents!only.!Betweenness,!in!particular,!is!influenced!by!pairs!of!patents!that!are!far!from!each!other!and!from!a!patent!of!interest,!allowing!it!to!be!affected!by!the!overall!structure!of!the!network.!

Two!questions!appear!to!be!promising!for!later!research.!One!is!to!further!test!whether!these!possible!benefits—avoiding!sensitivity!to!classifications!and!using!data!beyond!immediately!adjacent!patents—are!genuinely!aided!by!these!kinds!of!network!measures.!Another!is!to!further!test!that!complementarities!can!be!detected!by!network!measures!of!the!kind!described!here!and!refine!the!measurements.!Because!of!the!difficulty!in!identifying!complementarities!and!substitutes!between!patents!without!careful!examination!of!overlap!between!the!claims,!a!solid!quantitative!approximation!from!citation!data!has!large!potential!gains!for!empirical!work,!even!beyond!questions!involving!pools.!

4 Community&Detection,&Patent&Classification,&and&Patent&Portfolio&Concentration&

4.1 Introduction&In!the!economic!analysis!of!patents,!a!common!activity!is!to!break!patents!

down!into!technological!groups.!For!example,!where!technology!may!be!expected!to!have!an!effect!in!an!analysis!of!patent!statistics,!one!might!use!indicator!variables!on!patent!classes!(or!collections!of!classes)!as!a!means!of!detecting!and!controlling!for!such!effects.!Alternatively,!where!a!control!group!of!patents!is!needed,!class!is!a!natural!way!to!select!the!control!group.!

There!are!certain!limitations!of!patent!classes,!however.!They!are!defined!by!an!administrative!process!that!leads!to!classes!being!defined!in!several!different!ways.!Two!such!ways!are!industry!of!use!and!immediate!device!function,!leading!some!devices!will!be!classified!on!the!basis!of!who!uses!them,!and!some!on!the!basis!of!what!the!device!physically!does.!Another!limitation!is!the!fact!that!patent!class!definitions!are!determined!before!the!patents!they!cover!are!written,!and!then!subsequently!modified!depending!on!the!needs!of!the!patent!office.!This!leads!to!some!classes!being!defined!on!the!basis!of!relatively!old!criteria,!and!some!on!the!basis!of!recent!technological!developments.!These!class!definitions!are!valuable!from!the!perspective!of!the!patent!office,!but!the!way!in!which!they!are!produced!means!researchers!must!regard!them!as!biased!in!certain!ways.!

Network!analytic!tools!can!help!to!address!these!issues!by!identifying!natural!communities!of!patents!that!are!related!to!each!other!by!citations.!These!form!natural!ways!of!breaking!patents!down!into!technological!groups!that!arise!from!the!citation!structure!of!the!patent!database,!rather!than!from!administrative!calculations.!An!example!of!how!such!communities!may!be!used!is!to!detect!the!impact!of!concentration!in!patent!portfolio!returns.!

The!thesis!of!this!chapter!is!that!these!community!detection!methods!can!add!value!over!patent!classes!as!a!measurement!of!technology,!notably!by!picking!up!on!

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new!technological!trends!before!administrative!reclassifications.!I!further!apply!the!community!detection!methods!to!detect!positive!returns!to!technological!concentration!in!patent!portfolios.!

The!next!section!gives!an!overview!of!patent!classification!and!describes!relevant!prior!literature.!The!following!section!describes!several!ways!of!automatically!classifying!patents!into!communities!found!in!the!network!science!literature,!and!identifies!a!particular!one!that!by!its!construction!should!be!related!to!technological!similarity!between!patents.!The!fourth!section!describes!the!empirical!results,!which!consist!of!a!descriptive!analysis!of!the!communities!produced,!evidence!showing!that!the!communities!are!predictive!of!later!reclassification!by!the!patent!office!(thus!showing!that!communities!are!detecting!technological!similarity),!and!an!application!of!communities!in!a!market!value!regression!to!show!that!public!companies!have!positive!returns!to!technological!concentration.!The!last!section!concludes.!

4.2 Background&and&prior&literature&

4.2.1 Patent&classification&In!order!to!make!it!easier!to!search!patent!databases!for!prior!art,!patents!are!

administratively!divided!into!classes.!In!the!U.S.,!this!primarily!occurs!through!the!U.S.!Patent!Classification!System!(USPC).!Both!in!the!U.S.!and!internationally,!a!similar!uniform!system,!the!International!Patent!Classification!(IPC)!is!used.20!Patent!classes!are!used!both!for!searching!and,!in!the!U.S.,!to!assign!patents!to!examiners!with!the!appropriate!technical!background.!

In!the!USPC,!each!U.S.!patent!is!assigned!one!original!classification!and!any!number!of!crossSreference!classifications!(U.S.!Patent!and!Trademark!Office,!2012).21!!This!classification!is!part!of!the!patent’s!bibliographic!data!and!is!published!with!the!patent.!However,!patents!are!later!subject!to!reclassification!periodically!as!the!classes!are!adjusted,!and!these!reclassifications!are!published!separately.!

Classes!are!intended!to!have!mutually!exclusive!definitions.!In!practice,!especially!with!emerging!technologies!in!crossSdisciplinary!fields,!inventions!may!be!placed!in!multiple!classes!that!should!in!theory!be!grouped!together.!Moreover,!the!ways!in!which!classes!are!defined!can!make!it!less!clear!what!class!an!invention!belongs!in:!the!dominant!bases!of!classification!are!the!industry!(or!intended!use)!associated!with!the!invention!and!the!proximate!function!of!the!invention.!Thus,!a!cutting!implement!might!be!classified!on!the!basis!of!the!fact!that!it!is!used!for!cutting,!or!on!the!basis!of!the!industry!it!is!associated!with!(such!as!a!class!for!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!20!Complicating!matters,!the!European!Patent!Office!previously!used!its!own!system!(ECLA),!which!was!based!on!the!IPC,!and!the!EPO!and!U.S.!are!in!the!process!of!migrating!to!the!jointly!run!Cooperative!Patent!Classification!(CPC),!which!is!similar!to!the!IPC.!The!treatment!here!focuses!on!the!USPC,!which!has!been!used!repeatedly!in!past!research!on!U.S.!patents!(examples!are!discussed!below).!21!PreSgrant!publications!are!similar!but!with!different!terms:!they!are!assigned!one!“primary!classification”!and!any!number!of!“secondary!classifications.”!

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surgery!if!it!is!a!surgical!implement).!Other!factors!impacting!class!definition!are!the!statutory!type!of!invention!that!it!is—for!instance,!some!classes!apply!only!to!articles!of!manufacture!or!only!to!chemical!compounds22—or!the!physical!structure!of!the!invention.!

Each!class!has!one!or!more!subclasses!that!collectively!cover!the!whole!class.!Typically!this!is!assured!by!defining!a!miscellaneous!subclass!to!catch!any!inventions!in!the!class!not!otherwise!accounted!for.!Subclasses!are!hierarchically!nested,!and!each!classification!of!a!patent!(the!original!classification!or!the!crossSreference!classifications)!is!in!one!subclass.!When!the!classification!is!in!a!deep!hierarchically!nested!subclass,!it!matches!the!definition!of!the!next!higher!subclass!up!the!chain;!but!it!will!not!be!listed!in!that!subclass.!For!instance,!class!707!(Data!Processing:!Database!and!File!Management!or!Data!Structures)!contains!subclass!687!(data!integrity),!which!contains!subclass!690!(checking!consistency),!which!contains!subclass!691!(repair!consistency!errors).!A!patent!classified!under!707/691!necessarily!matches!the!definitions!of!707/687!and!707/690,!but!neither!of!those!will!be!listed!on!the!patent.!(Instead,!the!higher!subclasses!act!as!catchSalls!that!are!listed!on!patents!not!in!a!nested!subclass.)!

Some!USPC!subclasses!are!harmonized!with!international!classifications,!but!not!all.!Some!classes!have!subclasses!defined!by!multiple!aspects!of!the!invention,!such!as!by!steps!in!a!process!or!what!materials!the!process!is!used!with!(U.S.!Patent!and!Trademark!Office,!2005).!In!these!cases,!patents!classified!with!at!least!two!subclasses,!one!for!each!aspect.!

A!significant!factor!in!the!development!of!the!USPC!system!is!conflicting!needs!of!the!USPTO.!The!most!fundamental!of!these!is!searching!for!prior!art.!In!the!U.S.,!a!patent!claim!is!invalid!for!lack!of!novelty!when!all!elements!of!the!claim!are!met!by!a!prior!reference.!These!elements!are!(for!claims!on!products)!typically!physical!attributes!of!the!product.!For!instance,!a!heating!device!for!a!chemical!processing!plant!and!a!heating!device!for!a!swimming!pool!might!be!sufficiently!similar!that!one!preempts!a!claim!on!the!other,!due!to!their!similar!design,!even!though!they!have!different!intended!uses.!This!leads!to!patent!classes!written!to!avoid!reference!to!the!industry!or!intended!use!of!a!product.!

On!the!other!hand,!there!are!countervailing!practical!considerations!in!some!areas.!Leaving!aside!the!fact!that!classes!are!used!to!assign!patents!to!examining!groups,!and!so!need!to!reflect!the!administrative!division!of!labor,!in!some!cases!industry!is!the!preferred!way!to!categorize!an!invention!adapted!to!a!specific!use!in!order!to!enable!easy!retrieval!when!related!uses!appear!in!subsequent!patents.!

Moreover,!the!system!is!a!mix!of!older!and!newer!classes,!because!it!evolves!over!time.!New!classes!are!periodically!added!as!technologies!evolve,!such!as!class!977!(nanotechnology)!in!2004.!Like!initial!classification,!reclassification!is!ultimately!dependent!on!the!requirements!and!funding!of!the!USPTO!and,!with!improvements!in!computer!search!techniques,!can!naturally!take!a!lower!priority!over!time.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!22!Statutory!type!is!a!reference!to!the!four!kinds!of!inventions!identified!in!section!101!of!the!U.S.!Patent!Act,!which!identifies!any!“process,!machine,!manufacture,!or!composition!of!matter”!as!patentable.!

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4.2.2 Applications&of&patent&classification&Patent!statistics!provide!useful!information!as!economic!indicators,!and!

classes!are!the!only!practical!tool!available!for!classifying!them.!As!noted!by!Griliches,!because!the!classification!involves!functional!or!technological!principles,!the!system!“is!only!rarely!related!to!economists’!notions!of!products!or!wellSdefined!industries!(which!may!be!a!mirage!anyway)”!(1998).!Indeed,!even!if!one!interprets!classes!as!indicating!technology!rather!than!industry!or!product!category,!the!classes!are!designed!for!the!convenience!of!the!patent!examination!system!and!may!not!be!reliable!for!that!purpose!either.!

Classes!can!still!be!used!for!empirical!research.!For!instance,!Schmookler!(1962,!1966),!in!an!analysis!of!the!sources!of!inventive!activity,!calculated!industry!statistics!from!patents!with!subclass!data!by!sampling!patents!in!a!subclass!and!counting!that!subclass!for!an!industry!if!a!large!percentage!of!the!patents!in!that!subclass!appeared!to!be!useful!for!the!industry.!The!significance!of!patent!statistics!was!noted!by!the!science!policy!literature.!One!article,!for!instance,!described!the!measurement!issues!including!the!difficulty!in!using!classes!as!an!indication!of!industry!or!product!activity!where!multiple!distinct!industrial!fields!are!related!to!a!single!class!(such!as!internal!combustion!engines,!a!class!that!can!be!related!to!both!airplanes!and!cars)!(Pavitt,!1985).!This!makes!any!simple!concordance!between!classes!and!industries!unwieldy.!

Class!data!has!been!used!as!an!indicator!of!technology!more!directly.!For!instance,!in!a!study!of!R&D!spillover!effects!Jaffe!used!class!data!as!an!indication!of!the!technological!position!of!a!firm!(1986).!Noting!that!some!classes!were!larger!than!others,!he!aggregated!them!into!49!categories!chosen!to!bring!more!smaller!classes!into!single!categories.!That!data!was!used!to!divide!patenting!firms!into!clusters!with!similar!technological!positions.!To!perform!this!division,!Jaffe!gave!each!firm!a!technological!position!vector!consisting!of!how!many!patents!it!had!in!each!category,!and!a!preliminary!assignment!to!a!cluster!based!on!the!category!in!which!it!had!the!most!patents.!He!then!iteratively!changed!the!cluster!assignments!to!maximize!the!likelihood!of!observing!the!result!on!the!assumption!that!all!firms!in!a!cluster!drew!their!position!vectors!from!a!common!multinomial!distribution.!

This!approach!assigned!firms!to!technological!groups!in!a!way!that!didn’t!trivially!depend!on!the!underlying!classes,!and!makes!few!assumptions!about!the!meaning!of!classes!themselves.!Although!Jaffe!did!not!discuss!this!point!in!detail,!this!leaves!room!for!substantial!differences!between!classes,!so!that!some!may!be!based!on!industry!and!some!on!proximate!function,!or!some!may!be!more!specific!and!some!more!broad.!

Many!other!papers!implicitly!or!explicitly!treat!classes!as!being!necessarily!comparable!to!each!other,!and!as!constituting!natural!technological!groups.!Jaffe,!Trajtenberg,!and!Henderson!(1993)!explored!the!underlying!meaning!of!patent!citations,!using!geographic!information!in!patent!grants!to!test!the!extent!to!which!knowledge!flows!moved!locally.!They!used!classes!as!an!indication!of!technological!closeness!and!used!it!to!select!control!patents!in!a!comparison.!Subsequent!papers!used!similar!methods!(Hu!&!Jaffe,!2003;!Jaffe!&!Trajtenberg,!1999)!

In!response,!Thompson!and!FoxSKean!(2005)!argued!that!the!technological!classes!that!the!patent!offices!assigned!patents!to,!which!were!used!for!part!of!the!

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analysis,!were!too!broad!to!be!useful!in!an!empirical!comparison.!For!instance,!a!class!for!whips!and!related!apparatus!included!inventions!for!whip!manufacture,!whips!themselves,!and!electric!prods.!They!noted!that!aggregating!different!inventions!together!can!affect!study!outcomes!where!the!aggregates!are!used!to!select!controls.!In!a!followup!comment,!Henderson,!Jaffe,!and!Trajtenberg!(2005)!observed!that!in!many!cases!the!subclasses!were!small!enough!that!restricting!controls!to!sharing!a!subclass!with!a!subject!patent!eliminated!many!data!points!in!a!nonrandom!way.!

Another!study!that!used!patent!class!data!(in!this!case,!IPC!classes)!was!by!Kortum!and!Lerner!(1999).!In!examining!the!growth!of!in!the!number!of!patent!grants,!they!grouped!patents!by!class!and!calculated!how!many!classes!saw!how!much!growth!in!patenting!over!the!study!time!period.!This!type!of!analysis!uses!the!class!itself!as!the!unit!of!analysis.!

Lerner!(1994),!likewise,!used!IPC!classes,!in!this!case!to!identify!how!broad!a!patent!was,!in!a!study!of!how!the!breadth!of!patent!scope!affected!biotechnology!valuations.!The!IPC!system!was!used!because!it!defined!classes!more!on!the!basis!of!industry!than!the!USPC!system!does.!The!number!of!IPC!subclasses!(the!first!four!digits!of!the!IPC!classification)!designated!by!the!USPTO!indicated!how!broad!the!patent!was.!

The!IPC!is!the!main!alternative!to!the!USPC!system!for!detailed!classifications!of!each!patent,!offering!fineSgrained!classifications!of!each!granted!patent.!For!some!purposes,!coarser!classification!than!either!the!USPC!or!IPC!systems!are!helpful.!For!instance,!when!looking!for!evidence!of!substantial!difference!between!discrete!and!complex!technologies!a!very!rough!division!that!distinguishes!biological!and!chemical!inventions!from!communications!and!electrical!inventions!may!be!useful.!The!NBER!patent!citation!data!file!contains!a!division!of!this!kind!(Hall!et!al.,!2001),!which!has!been!used!for!technological!analysis!at!a!more!aggregated!level!(Nemet!&!Johnson,!2012).!

4.2.3 R&D&and&concentration&Technological!concentration!and!the!return!to!firm!R&D!investments!is!

discussed!later!in!this!chapter.!A!few!previous!papers!have!addressed!this!subject.!A!study!by!Narin,!Noma,!and!Parry!(1987)!evaluated!the!relationship!between!concentration!and!firm!profits!and!sales!in!the!biotechnology!sector,!finding!a!significant!positive!correlation.!They!defined!technological!concentration!in!three!ways,!as!the!percent!of!patents!held!by!the!firm!in!a!specific!USPC!class!of!drugs!(class!424),!the!percent!in!that!class!or!a!class!of!chemicals!(class!260),!and!as!the!percent!in!class!424,!260,!or!the!next!most!important!class!in!the!firm’s!portfolio.!They!did!not!address!whether!returns!increased!or!decreased!with!scale.!Lin!and!Chen!(2005)!found!evidence!of!negative!returns!to!concentration!when!measured!with!a!Herfindahl!index!based!on!the!NBER!patent!data!file’s!six!technology!categories!(Hall!et!al.,!2001).!

4.3 Patent&citations&and&communities&This!section!explains!community!detection!algorithms.!They!are!broadly!

describable!as!methods!of!dividing!patents!(or!more!generally,!nodes!of!a!network)!

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into!groups!such!that!patents!within!a!group!are!more!closely!related!to!each!other!than!those!outside!the!group.!Such!methods!are!not!all!equivalent!and!the!specific!choice!used!here!is!explained.!The!communities!produced!by!that!method!are!likely!to!be!related!to!technological!areas,!because!of!the!specific!value!that!the!community!detection!method!described!is!designed!to!maximize.!As!a!result!these!communities!are!likely!to!be!better!predictors!of!technological!affinity!than!the!USPC!classification!in!cases!where!the!USPC!system!has!not!yet!been!updated!to!take!into!account!technological!changes.!Finally,!a!specific!application!of!community!detection!is!to!detect!technological!concentration!within!firm!R&D!efforts.!

4.3.1 Clustering&related&patents&into&groups&The!many!ways!that!patent!classes!are!used!empirically,!combined!with!the!

adShoc!nature!of!how!the!classification!system!is!updated!over!time!based!on!the!needs!of!USPTO!searchers,!motivates!a!desire!to!divide!patents!into!groups!independently!of!the!patent!classification!system.!Because!patent!citations!provide!a!large!quantity!of!data!connecting!related!patents,!they!are!a!natural!place!to!look!to!as!a!source!of!data!on!patent!subject!matter.!One!would!prefer!to!construct!a!measurement!of!what!subject!matter!a!patent!has!in!a!way!that!can!be!justified!as!“natural”!on!the!basis!of!citations!between!them.!

How!best!to!do!so!is!not!necessarily!obvious.!Citations!link!one!patent!to!another.!For!many!statistical!techniques,!what!is!convenient!is!to!identify!for!each!patent!one!of!a!relatively!small!number!of!groups,!which!is!a!very!different!type!of!feature!for!the!purposes!of!many!empirical!approaches.!

This!general!type!of!problem!has!been!addressed!before!in!other!disciplines,!with!network!methods.!Networks,!generally,!are!entities!called!nodes!(sometimes,!vertexes)!combined!with!connections!between!them!called!edges!(or,!sometimes,!arcs!or!links).!They!are!studied!in!various!contexts,!such!as!animal!communication!(where!animals!are!nodes!and!edges!indicate!communication!between!them),!documents!(where!nodes!are!web!pages!and!edges!indicate!hyperlinks),!computers!on!a!communications!network!(where!nodes!are!computers!and!edges!are!direct!links),!or!social!networks!(where!nodes!are!individuals!and!edges!indicate!friendship!relations).!

Generically,!researchers!often!want!to!divide!nodes!into!groups.!There!are!various!ways!of!doing!so;!in!some!cases,!we!would!want!the!groups!to!be!of!preset!sizes!(for!instance,!when!dividing!tasks!up!to!groups!of!workers).!In!the!case!of!patents,!one!would!prefer!to!let!the!data!determine!what!the!right!size!of!a!group!is,!and!not!necessarily!expect!all!groups!to!be!of!the!same!size.!This!is!because!part!of!the!point!is!to!get!that!kind!of!information!out!of!the!network,!and!the!subject!matter!of!patents!is!not!evenly!distributed:!one!technological!area!may!involve!large!numbers!of!patents,!and!another!few.!On!the!other!hand,!results!should!preferably!be!“reasonable”!in!the!sense!of!not!producing!too!many!groups!to!use!effectively.!

In!the!literature,!network!scientists!have!examined!ways!of!collecting!nodes!into!groups!that!are!similar!to!each!other.!A!simple!way!to!do!this!is!called!structural!equivalence,!in!which!nodes!are!considered!equivalent!if!they!have!the!same!relationships!to!other!nodes.!There!are!ways!of!finding!approximate!structurally!equivalent!nodes!as!well,!because!exact!equivalence!is!often!not!present!in!cases!of!

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interest.!The!nodes!found!this!way!form!a!natural!group!that!should!be!similar!to!each!other!in!some!underlying!way.!

More!broadly,!networks!can!be!divided!into!groups!by!community!detection!algorithms,!and!the!resulting!groups!are!called!communities.!Community!detection!algorithms!can!be!classified!by!how!they!work!or!by!what!aspect!of!the!resulting!groups!they!try!to!maximize.!Generally,!communities!can!be!thought!of!as!being!regions!where!nodes!link!to!each!other!more!than!to!outside!nodes.!As!an!example!used!in!the!network!science!literature,!communities!can!estimate!in!a!herd!of!animals!what!subgroups!the!herd!is!likely!to!split!into!if!it!becomes!too!large!to!continue!to!function!as!a!single!group.!

To!identify!a!community,!one!may!describe!an!objective!function!(such!as!the!number!of!edges!within!a!community!divided!by!the!number!of!edges!crossing!the!community!boundary23).!Calculating!the!set!of!communities!that!maximizes!such!a!function!exactly!is!typically!not!computationally!feasible,!but!there!are!approximation!algorithms!that!come!close.!!

Community!detection!algorithms!may!produce!communities!that!are!overlapping!or!nonoverlapping.!Nonoverlapping!communities!may!be!more!useful!in!areas!such!as!technological!groups!where!one!tends!to!think!that—while!an!invention!may!be!relevant!to!multiple!technologies—most!inventions,!most!of!the!time,!are!refinements!or!improvements!within!an!existing!specific!area.!

The!communities!produced!may!be!hierarchically!nested.!In!hierarchical!clustering,!one!first!selects!a!distance!metric!that!can!measure!distances!between!nodes.!Then,!the!network!can!be!divided!into!groups!that!are!close!to!each!other!in!some!way.!In!this!way!it!is!possible!to!divide!a!network!into!groups!that!are!hierarchically!related.24!This!creates!a!tree!structure!of!groups!that!may!be!useful!in!some!applications.!A!related!method!identifies!edges!with!high!“edge!betweenness,”!defined!as!the!number!of!shortest!paths!that!run!through!the!edge,25!and!removes!them;!this!process!repeats!until!the!network!is!divided!in!two,!which!form!the!two!largest!communities!(Girvan!&!Newman,!2002).!Continuing!from!there!produces!a!hierarchical!division!into!progressively!more!communities.!

These!example!algorithms!demonstrate!two!issues!that!may!affect!community!detection!algorithms.!First,!some!may!require!some!tuning!or!subsequent!analysis!to!determine!appropriate!communities,!as!in!the!case!of!hierarchical!models.!Second,!speed!is!an!important!factor!for!large!networks!such!as!the!patent!citation!network.!In!the!case!of!the!edgeSbetweenness!algorithm,!the!betweenness!of!each!edge!must!be!recalculated!each!time!an!edge!is!removed.!For!small!networks!this!can!be!acceptable;!for!networks!with!millions!of!nodes!like!the!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!23!!This!measurement!can!be!thought!of!as!meaning!a!good!community!has!small!“surface!area!per!volume”!(Leskovec,!Lang,!&!Mahoney,!2010).!24!At!the!individual!node!level,!one!can!also!calculate!a!perSnode!clustering!coefficient!which!measures!how!close!the!node’s!nearest!neighbors!are!to!each!other.!25!If!the!two!nodes!have!multiple!shortest!paths,!then!each!counts!for!a!proportionate!fraction.!This!definition!for!edges!is!similar!to!the!measurement!of!betweenness!centrality!of!a!node!in!the!network,!which!was!described!in!chapter!2.!

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patent!citation!network,!the!algorithmic!design!is!critical!to!whether!the!operation!is!feasible!at!all.!

An!approach!that!has!sufficient!speed!to!handle!the!patent!citation!network!is!leading!eigenvector!community!detection!algorithm!(Newman,!2006).!It!can!be!understood!as!choosing!communities!so!as!to!maximize!the!number!of!edges!within!communities!minus!the!expected!number!of!such!edges.!(This!difference!is!called!the!modularity!of!the!output!communities.)!

Here,!the!“expected!number!of!such!edges”!requires!explanation.!Think!of!the!nodes!as!a!fixed!set!and!the!edges!as!being!randomly!determined!under!a!probability!distribution!that!depends!on!the!community!structure.!

Intuitively,!this!maps!to!how!one!can!think!of!patent!citations!being!generated.!In!the!case!of!patents,!nodes!are!produced!by!technological!and!investment!trends!that!are!probably!not!themselves!determined!by!the!citation!structure.!Each!patent!is!related!to!some!technological!area!(think!of!each!one!as!being!labeled!with!a!specific,!unobservable!technology).!Citations!are!produced!by!legal!procedures!that!result!in!which!patents!are!cited!being!related!to!the!technology!of!the!invention,!so!that!citations!are!more!likely!to!patents!labeled!with!the!same!technology!than!patents!labeled!with!a!different!technology.!With!this!interpretation!of!the!patent!citation!system,!we!would!like!to!use!the!citation!structure!to!get!back!out!the!underlying!technological!areas.!The!output!of!the!community!detection!algorithm!can!be!thought!of!as!giving!a!model!consisting!of!an!assignment!of!community!labels!to!patents.!

The!approach!of!the!leading!eigenvector!algorithm!is!to!select!the!assignment!of!community!labels!such!that!the!citation!network!is!better!described!by!those!community!labels!than!a!null!model!in!which!all!patents!are!in!a!single!community.!In!the!null!model,!all!patents!being!in!the!same!community!frees!patents!to!cite!other!patents!without!regard!to!technological!similarity,!within!certain!limits.!

Those!limits!are!designed!to!make!the!null!model!resemble!the!actual!citation!network.!In!an!arbitrary!probability!distribution!of!edges,!every!patent!might!have!the!same!expected!number!of!edges;!but!in!the!patent!citation!network,!some!nodes!clearly!receive!more!citations!than!others.!A!probability!distribution!for!edges!in!which!this!weren’t!the!case!would!clearly!differ!from!the!actual!network!in!ways!other!than!the!community!structure.!To!be!specific,!each!node!is!constrained!to!have!the!same!degree!(number!of!citations!in!or!out)!in!expectation!as!it!does!in!the!actual!network.!In!the!case!of!patents,!that!means!that!some!measurements!of!importance!or!value!of!patents!are!not!allowed!to!change!in!the!null!model.!Subject!to!those!constraints,!edges!can!be!positioned!at!random.!

This!edge!probability!model!determines!the!number!of!edges!that!are!“expected”!in!a!given!community,!and!in!the!leading!eigenvector!method,!communities!are!chosen!to!maximize!the!excess!of!actual!edges!over!these!expected!edges.!The!actual!computation!is!performed!with!spectral!optimization!methods!that!are!described!in!the!original!description!of!the!algorithm!by!Newman!(2006).26!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!26!These!methods!are!what!lead!to!the!“leading!eigenvector”!term.!The!specific!implementation!of!those!methods!used!here!is!from!the!igraph!networkSstatistics!library!(Csardi!&!Nepusz,!2006).!

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For!dividing!patents!into!technological!groups,!this!algorithm!has!several!practical!benefits!over!alternatives.!A!key!benefit!is!the!modularity!measurement!(the!excess!citations!within!communities),!which!is!important!to!the!interpretability!of!the!results.!A!number!of!other!algorithms!produce!results!that!tend!to!“look!reasonable”!as!a!description!of!the!networks!they!analyze,!but!without!necessarily!being!as!clear!about!what!they!are!doing.!

A!second!benefit!is!speed.!As!mentioned!above,!networks!of!millions!of!nodes!can!require!different!methods!than!small!networks.!The!leading!eigenvector!algorithm!is!capable!of!being!run!on!a!data!set!the!size!of!the!patent!database.!

Third,!the!number!and!size!of!the!groups!produced!are!determined!by!the!structure!of!the!network!and!need!not!be!determined!by!the!experimenter.!This!is!an!advantage!in!helping!to!assure!that!the!results!are!objective!and!not!affected!by!judgment!calls!made!by!a!researcher!using!the!system.!

A!possible!tradeoff!in!the!selection!of!the!leading!eigenvector!method!is!the!stability!of!the!resulting!groups!over!time.!A!study!of!random!networks!created!networks!by!adding!more!nodes!and!edges!over!time,!running!community!detection!algorithms!on!earlier!and!later!versions!of!the!same!network,!and!judging!how!stable!the!communities!that!resulted!were.!The!leading!eigenvector!method!produced!communities!that!were!reasonably!stable,!but!somewhat!less!so!than!other!methods!(Bommarito,!Katz,!&!Zelner,!2010).27!Furthermore,!the!method!is!for!undirected!networks.!That!is,!it!discards!information!in!the!citation!graph!about!the!direction!in!which!each!citation!points,!from!younger!publication!to!older!publication,!and!instead!operates!on!a!network!in!which!edges!between!nodes!exist!without!any!direction!associated!with!them.!On!the!other!hand,!this!may!be!the!case!for!any!appropriate!method,!as!technological!relationships!are!reciprocal!in!nature:!if!a!patent!is!in!the!same!technical!area!as!another,!then!the!other!is!the!same!area!as!the!first.!

4.3.2 Classes&compared&to&communities&Having!argued!the!merits!of!leading!eigenvector!community!detection!over!

other!community!detection!methods,!I!now!compare!the!communities!produced!by!such!a!method!to!USPC!classes.!USPC!classes!have!certain!disadvantages!for!patent!statistical!analysis,!and!communities!are!likely!to!track!certain!forms!of!technological!affinity.!This!leads!to!a!hypothesis!that!the!validity!of!the!communities!produced!can!be!tested!using!USPC!reclassification!decisions.!

Patent!classes!have!been!used!throughout!economic!patent!literature,!in!many!cases!in!ways!without!careful!justification.!The!typical!pattern!is!shown!by!section!4.2.2:!a!researcher!needs!to!divide!the!universe!of!patents!up!to!control!the!effect!of!the!field!of!invention!of!a!patent,!or!the!industry!it!is!in.!The!USPC!class!or!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!27!It!is!debatable!how!much!weight!to!put!on!this.!Technological!areas!evolve!over!time!and!should!not!necessarily!be!expected!to!remain!the!same.!Furthermore,!the!Bommarito,!Katz,!and!Zelner!study!used!randomly!created!networks!that!did!not!have!a!natural!community!structure!there!to!be!found.!This!is!unlike!actual!citation!networks!where!citations!are!affected!by!an!underlying!subjectSmatter!affinity.!

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subclass,!or!sometimes!the!IPC!subclass,!is!the!only!conveniently!available!tool!that!comes!close!to!that,!and!is!the!one!used.!

The!problem!with!this!approach!is!that!patent!classifications!are!an!administrative!tool!that!is!not!designed!for!this!kind!of!use.!Patent!classifications!exist!to!facilitate!prior!art!searches!by!examiners,!not!to!organize!which!patents!are!related!to!each!other.!For!instance,!classes!are!organized!by!what!a!claimed!thing!is,!rather!than!what!it!is!used!for;!a!machine!that!contains!chambers!for!fluid!to!move!and!a!device!to!agitate!it!may!be!a!washing!machine!or!a!part!of!an!industrial!manufacturing!device,!but!if!it!can!be!described!physically!in!the!same!way!it!would!ideally!end!up!in!the!same!patent!class,!because!under!US!patent!law!one!document!can!be!prior!art!with!respect!to!a!patent!in!the!other!industry.!

Moreover,!the!US!classification!system!is!less!clean!than!that!in!practice.!The!system!contains!old,!historical!classes!that!are!based!on!industry!of!use!(like!beekeeping),!classes!that!are!based!on!the!necessary!use!of!the!device!(like!all!heat!exchange!devices,!regardless!of!industry),!classes!based!on!the!effect!or!the!product!produced,!classes!based!on!the!physical!structure!of!the!device,!and!classes!that!contain!subclasses!that!attempt!to!classify!inventions!in!their!area!according!to!several!of!these!methods.!

Patent!classes!might!still!be!good!choices!as!proxies!for!industry!or!field!of!invention.!But!in!some!cases!empirical!results!may!be!sensitive!to!the!choice!of!classification.!For!instance,!Jaffe,!Trajtenberg,!and!Henderson!(1993),!which!used!USPC!classes,!is!a!clear!case!in!which!the!choice!of!classification!was!shown!to!be!significant!to!the!outcome!(whether!or!not!the!classification!chosen!by!those!authors!was!the!best!possible).!

Even!if!it!is!clear!what!kind!of!classification!is!right!in!a!given!application,!it!would!be!helpful!to!have!a!classification!system!that!avoided!the!historical!biases!that!lead!to!different!industries!being!divided!into!classes!by!varying!standards,!such!as!field!of!use!or!product!produced.!There!are!several!ways!to!devise!such!a!system.!Where!researchers!are!interested!mainly!in!gross!differences!between!industries,!for!instance,!a!relatively!small!number!of!classifications!may!solve!the!problem,!which!may!be!within!what!the!research!community!can!create.!This!approach!was!taken!by!the!NBER!citation!data!file!(Hall!et!al.,!2001).!

Where!more!detailed!classification!is!required,!constructing!classes!from!the!USPC!classes!or!by!hand!classification!may!both!be!impractical.!Community!detection!algorithms!can!fill!this!gap.!They!can!be!more!objective!by!grouping!patents!without!requiring!researcher!judgment,!and!can!potentially!divide!patents!more!finely!than!can!be!done!by!hand.!They!can!also!assign!a!single!community!per!patent,!which!other!methods!may!not!do.28!

A!possible!drawback!of!algorithmically!created!groups!is!that!they!may!be!more!difficult!to!interpret.!They!may!include!patents!that!appear!to!involve!different!industries!or!kinds!of!products,!for!instance.!This!does!not!necessarily!mean!that!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!28!This!point!may!be!important!in!some!applications.!The!USPC!system!assigns!a!single!original!classification,!which!is!often!assumed!to!be!the!most!important!one.!But!which!one!is!original!and!which!are!crossSreference!classifications!may!not!be!consistently!determined!in!practice.!

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they!are!not!useful!groupings,!because!the!best!description!of!the!structure!of!the!prior!art!may!unite!inventions!that!are!connected!for!reasons!not!immediately!obvious.!

The!algorithm!used!to!construct!the!communities,!combined!with!analysis!of!how!citations!are!generated,!can!clarify!the!significance!of!the!communities!generated.!As!explained!above,!the!leading!eigenvector!algorithm!used!in!this!chapter!attempts!to!choose!communities!so!as!to!maximize!the!number!of!excess!citations!within!communities,!relative!to!the!number!of!expected!citations!under!a!null!model!in!which!citations!are!added!at!random!subject!to!the!requirement!that!the!expected!number!of!citations!involving!any!patent!is!constant.!This!closely!matches!an!intuitive!model!of!patent!citation!formation!in!which!each!patent!is!related!to!a!technological!area!and!citations!are!more!likely!within!such!a!technological!area!than!between!areas.!

There!are!two!implicit!assumptions!in!this!comparison!that!must!be!justified!in!order!to!equate!communities!with!technological!areas.!First,!it!must!be!valid!to!label!each!patent!as!being!related!or!primarily!related!to!a!single!technology,!as!opposed!to!an!alternate!model!in!which!(for!example)!there!is!no!such!appropriate!labeling!and!one!must!necessarily!consider!each!patent!to!involve!multiple!technologies.!This!assumption!is!implicit!in!any!analysis!in!which!the!patent!is!the!unit!of!observation!and!one!wishes!to!add!indicator!variables!for!patent!technology!or!select!controls!having!the!same!technology!as!the!patent.!As!discussed!in!section!4.2.2,!many!such!analyses!have!been!done,!often!using!the!USPC!class!as!the!technology!label.!

Second,!it!must!be!the!case!that!the!citations!are!higher!between!patents!in!the!same!technology.!This!can!be!justified!by!reference!to!how!citations!are!generated!in!the!operation!of!the!patent!system,!especially!citations!that!are!due!to!the!examiner.!In!the!U.S.!system,!citations!may!be!due!to!the!applicant!or!the!examiner.!Applicants!are!required!to!supply!to!the!patent!office!relevant!references!they!are!aware!of,!such!as!patents!cited!by!examiners!in!prior!rejections!of!related!patents.!Examiners!must!supply!references!when!they!reject!patents!for!being!nonnovel!or!obvious:!where!the!patent!is!exactly!anticipated!by!a!prior!publication,!the!publication!(often!a!patent)!is!cited,!and!when!it!is!obvious!the!rejection!almost!always!cites!two!or!more!specific!prior!publications!(often!two!publications!that!each!contain!a!subset!of!the!material!described!in!the!patent,!which!combined!have!all!that!material).!

This!process!results!in!patents!citing!patents!that!are!related!in!that!they!contain!similar!mechanical!structure,!chemical!structure,!procedural!steps,!or!other!elements.!This!similarity!is!a!type!of!technological!similarity!that!tracks!inventions!as!they!change!over!time.!This!results!in!citations!being!more!prevalent!between!patents!in!the!same!technological!area,!and!should!lead!to!communities!being!indicative!of!technological!relationships.!

A!way!to!test!that!the!community!decisions!are!thus!related!to!technological!classifications!comes!from!USPC!classification!decisions.!Although!the!USPC!only!imperfectly!follows!new!technologies,!when!new!technologies!become!significant!it!is!adapted!in!order!to!meet!the!needs!of!examiners.!These!changes!occur!through!reclassification!orders!issued!by!the!USPTO’s!classification!office,!and!are!designed!

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to!make!prior!art!easier!to!search!for.!Because!those!searches!are!ultimately!related!to!validity!decisions,!the!revised!patent!classes!must!track!patent!technological!relationships.!

A!specific,!clear,!and!relatively!recent!reclassification!was!the!creation!of!class!977,!created!for!nanotechnology!in!2004.!Communities!that!are!created!independently!of!the!classification!system!should!be!predictive!of!reclassification!into!new!classes.!This!justifies!the!following!hypothesis.!3. Communities.are.predictive.of.USPC.classification.decisions..

4.3.3 Returns&to&concentration&I!turn!attention!now!to!an!example!specific!application!of!communities.!I!

describe!reasons!for!believing!that!there!should!be!positive!returns!to!technological!concentration,!and!describe!a!test!of!that!using!market!value!data.!

By!technological!concentration,!I!mean!whether!a!firm’s!patents!are!concentrated!in!one!technology!or!spread!among!many!technologies.!This!can!be!conceptually!measured!with!a!Herfindahl!index!of!the!shares!communities!have!among!the!patents!in!a!patent!portfolio.!

Economic!returns!to!specialization!are!large!in!the!overall!economy,!with!firms!naturally!using!their!specific!competencies!as!a!source!of!value.!In!the!case!of!R&D,!greater!specialization!may!increase!value,!with!firms!that!focus!on!their!areas!of!expertise!benefiting!from!focus!on!deepening!particular!technical!areas.!

There!are!several!wellSknown!benefits!of!firm!specialization.!It!can!enable!reuse!of!scientific!expertise,!as!staff!become!more!familiar!with!specific!technologies.!It!can!deepen!the!ability!to!use!a!specific!technology!or!knowledge!of!a!specific!industry,!or!improve!firm!ability!to!differentiate!from!rivals!within!a!specific!areas.!Firms!that!overdiversify,!in!contrast,!may!have!lower!competence!in!any!single!area!and!receive!fewer!advantages!from!synergistic!effects!within!a!market.!

In!addition,!firm!specialization!may!simply!indicate!market!power.!Firms!concentrated!in!and!profiting!from!a!specific!area!of!industry!may!simply!be!focused!on!that!industry!because!they!have!acquired!market!power!in!it!due!to!entry!barriers!and!other!phenomena.!In!this!case,!a!positive!relationship!between!market!value!and!portfolio!technical!specialization!is!not!necessarily!an!indicator!that!the!firm!benefits!from!special!skills!or!competence,!but!may!merely!indicate!market!power.!

There!are!opposing!possible!effects!as!well.!Concentration!may!simply!have!decreasing!returns.!!Another!opposing!effect!may!be!present!if!firms!have!too!great!a!concentration!in!a!single!area.!Partly!specialization!may!simply!increase!risk!if!carried!too!far.!Another!effect!may!be!due!to!patent!portfolio!races!that!are!present!as!a!result!of!growth!in!patenting!in!recent!years.!This!growth!of!patenting!may!be!partly!driven!by!strategic!use!of!patents,!particularly!in!complex!technologies.!

In!some!cases,!patent!stockpiling!in!response!to!such!a!situation!may!be!practically!obligatory:!a!firm!that!is!the!only!one!in!an!area!not!to!patent!may!risk!being!excluded!as!a!result!of!infringement!suits.!Those!that!regularly!patent,!however,!may!avoid!such!suits!even!though!the!value!of!the!patents!is!a!net!negative!to!the!industry,!being!caused!by!holdup!risks!to!exceed!the!rate!that!optimally!promotes!inventive!research.!

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However,!I!expect!communities!to!pick!up!overall!technologies.!The!ones!studied!at!the!moment!are!fairly!large!(as!discussed!in!the!next!section).!Adverse!effects!of!overspecialization!should!be!manifest!at!a!relatively!low!level!where!patents!are!divided!more!finely!into!groups.!

These!considerations!of!the!value!of!focus!and!strategic!portfolio!value!suggest!a!hypothesis!that!there!should!be!positive!returns!to!concentration.!Communities!may!be!used!to!identify!such!concentration,!with!firms!with!more!communities!necessarily!being!more!diverse!in!R&D!activity!and!those!with!less!being!more!concentrated.!!4. Portfolio.concentration.in.specific.technological.areas.is.positively.associated.with.

market.value..

4.4 Data&and&results&

4.4.1 Descriptive&results&Patent!data!was!obtained!from!the!NBER!patent!data!project,!containing!

patent!bibliographic!and!citation!information!from!U.S.!utility!patents!issued!from!1976!through!2006.!The!patents!were!divided!into!communities!using!the!leading!eigenvector!community!detection!algorithm.!Because!that!algorithm!operates!on!undirected!networks,!the!citation!data!were!made!symmetric,!discarding!directional!information!about!each!citation.!

The!first!question!addressed!is!how!numerous!and!how!large!the!resulting!communities!are.!Table!18!displays!basic!figures!about!community!sizes!and,!for!comparison,!the!USPC!classes!of!the!patents.!There!are!429!communities!compared!to!721!USPC!classes!in!the!data.!The!median!and!average!sizes!of!communities!are!both!larger,!and!both!are!significantly!skewed!towards!larger!values.!

To!provide!an!indication!of!how!communities!actually!look,!samples!of!titles!of!patents!from!several!communities!are!shown!in!Table!19!through!Table!22.!Each!lists!ten!patents!chosen!at!random!from!the!community!listed.!The!communities!were!chosen!to!be!from!among!the!larger!ones,!with!one!smaller!community!also!chosen.!

The!first!listed!is!labeled!community!102.!(Because!communities!are!created!automatically!they!do!not!have!meaningful!names.!The!leading!eigenvector!algorithm!assigns!each!a!number;!these!numbers!are!used!here!as!a!convenient!reference!but!are!essentially!meaningless!in!themselves.)!This!community!contains!58,228!patents,!which!appear!to!include!various!apparatuses!related!to!chemicals.!Not!all!patents!in!the!list!match!that!description;!the!first!is!a!cover!made!out!of!yarn,!and!one!is!a!golf!tool.!

Community!172,!which!contains!123,767!patents,!is!more!cohesive!in!subject!matter.!Several!members!relate!to!digital!timing!or!control!systems.!Two!exercise!machines!are!also!present,!however.!Community!230,!containing!45,920!members,!contains!various!mechanical!devices,!and!also!two!biological!agents.!Community!386!has!250!members,!and!all!ten!patents!listed!relate!to!digital!image!processing.!

There!are!also!59!communities!that!each!contains!only!a!single!element.!To!provide!an!indication!of!what!they!are!like,!Table!23!lists!ten!patents!randomly!chosen!from!these!59.!It!is!not!the!case!that!these!are!simply!patents!isolated!from!

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the!rest!of!the!patent!universe!due!to!a!lack!of!citations,!as!they!are!connected!to!other!patents.!One!possible!reason!for!their!isolation!is!the!approximate!nature!of!the!community!detection!algorithm.29!

This!evidence!is!qualitative,!but!shows!clear!technological!similarities!within!communities.!There!is!also!evidence!that!communities!contain!some!strange!bedfellows,!such!as!the!biological!agents!in!a!community!that!contains!a!number!of!mechanical!devices.!This!may!be!due!to!statistical!noise,!or!due!to!the!fact!that!a!computerSgenerated!classification!should!not!be!expected!to!copy!a!human!intuition!about!technological!similarity.!Other!possibilities!are!that!larger!communities!tend!to!group!some!subject!matter!together,!or!that!there!are!nonSapparent!relationships!between!the!patents!listed!(for!example,!some!mechanical!devices!that!are!in!community!230!may!be!related!to!the!creation!of!the!biological!agents!listed).!In!any!event,!the!technological!similarities!shown!are!consistent!with!the!hypothesis!that!communities!detect!such!similarity!and!that!they!could!contain!information!not!evident!from!USPC!classes!alone.!

4.4.2 Reclassification&and&nanotechnology&USPC!class!977,!relating!to!nanotechnology,!was!originally!formed!through!

gathering!patents!from!several!classes!and!assigning!them!by!hand!to!the!newly!defined!class.!Those!not!assigned!were!left!where!they!were.!

I!used!the!NBER!patent!data!project!data!file!to!obtain!the!classification!of!each!patent!at!the!time!it!was!issued,!and!used!the!USPTO!master!classification!file!to!obtain!the!current!patent!classifications.!I!identified!patents!in!the!preexisting!classes!based!on!the!original!patent!classifications!associated!with!current!class!977,!and!which!were!issued!in!those!classes!prior!to!the!reclassification!in!2004.!

The!strategy!to!test!hypothesis!3!had!two!parts.!First,!I!chose!select!communities!that!had!some!substantial!overlap!with!USPC!class!977!or!classes!that!were!reclassified!into!it.!For!each!patent,!I!determined!whether!the!patent!was!in!fact!classified!into!class!977,!and!used!a!chiSsquared!test!to!judge!whether!the!communities!were!predictive!of!classification.!The!results!are!shown!in!Table!24!and!rule!out!the!null!hypothesis!of!no!relationship!at!the!1%!level.!

Second,!I!used!a!probit!model!with!indicator!variables!for!communities!and!pertinent!USPC!classes!to!test!how!classification!into!class!977!was!predicted!by!communities!and!classes.!The!results!in!Table!25!show!that!both!communities!and!classes!provide!independent!information!relevant!to!inclusion!in!class!977;!the!USPC!class!regression!in!column!2!shows!a!higher!pseudoS!!!than!the!communitySonly!regression,!but!combining!both!provides!a!significantly!better!fit!than!either!alone.!

4.4.3 Returns&to&concentration&Turning!to!hypothesis!4,!we!measure!specialization!in!two!ways,!using!

communities!and!USPC!classes.!In!both!cases,!we!take!the!HHI!concentration!index!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!29!!As!explained!above,!exact!solutions!to!the!community!detection!problem!of!maximizing!the!modulus!of!a!network!can!be!too!computationally!expensive!to!be!feasible,!and!the!best!algorithms!create!good!approximations.!

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of!the!shares!of!the!communities!or!classes,!respectively,!of!the!patents!in!the!patent!portfolio.!!These!indexes!indicate!how!technologically!concentrated!the!patent!portfolio!is.!

Market!returns!to!technological!concentration!are!estimated!using!the!market!value!methods!described!in!chapter!2.!As!described!there,!we!use!Compustat!data!from!public!company!financial!statements,!a!matching!file!from!the!NBER!patent!data!project!that!links!patent!assignees!to!the!Compustat!financial!records,!and!estimate!the!impact!of!the!relevant!variables!on!market!value!using!an!estimating!equation.!Modifying!that!equation!slightly!to!include!the!technological!concentration,!we!have!

ln !!"!!"= ! ln !! + !!! ln!!" + !! ln

!!"!!"

+ !!! ln!!"!!"

+ !!! ln! + !!! ln! !!where!!!is!the!HHI!concentration!index!of!the!shares!of!the!communities!in!the!patent!portfolio.!As!in!the!earlier!chapter,!!!"!indicates!R&D!stock,!!!"!indicates!patent!stock,!!!"!indicates!citation!stock,!!!"!represents!physical!assets,!!!"!represents!physical!assets,!and!!!!is!a!year!effect.!

Table!26!shows!an!extension!of!the!market!value!regression!which!adds!the!community!concentration!variables.!The!coefficients!in!columns!1!and!3!indicate!increased!concentration!improves!market!value;!the!quadratic!term!indicates!increasing!returns!to!concentration.!Similar!regressions!for!the!Herfindahl!concentration!index!based!on!U.S.!patent!class!(columns!2!and!4)!found!a!similar,!effect.!When!both!the!community!and!patent!classes!were!included!together,!both!were!significant,!indicating!each!provided!some!information!the!other!lacked.!The!results!are!consistent!with!the!hypothesis!of!returns!to!specialization!in!patent!portfolios.!

The!results!in!Table!26!are!robust!to!several!changes!in!the!specification,!including!adding!citation!stocks,!adding!centrality!stocks,!or!removing!the!patent!stock!variable!from!the!equation.!

4.5 Conclusion&This!chapter!demonstrated!that!communities!carry!information!about!the!

technology!of!patents.!This!information!is!an!improvement!over!the!USPC!class!in!certain!ways,!including!in!that!it!can!adapt!to!technological!changes!more!quickly!than!administrative!classifications!do!and!in!that!it!carries!some!information!that!administrative!classes!do!not.!They!provide!a!way!to!measure!technological!concentration,!and!there!are!positive!returns!to!such!concentration.!

Several!avenues!for!further!work!present!themselves.!The!market!effect!of!R&D!concentration!is!a!subject!in!its!own!right!that!could!be!further!explored.!For!communities!as!such,!other!community!detection!algorithms!can!be!tested.!In!light!of!the!result!that!the!communities!generated!by!this!method!are!large,!one!avenue!of!interest!is!creating!tighter!ones.!Available!algorithms!include!some!that!are!specifically!meant!for!use!on!large!networks!(Clauset,!Newman,!&!Moore,!2004),!as!well!as!hierarchical!algorithms!that!naturally!create!subclasses!(Newman!&!Girvan,!2004).!A!further!possibility!is!taking!into!account!temporal!information!inherent!in!the!citation!network.!Unlike!some!networks,!the!citation!network!exists!as!a!series!of!networks!that!evolve!over!time.!A!series!of!communities!can!in!principle!be!

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generated!and!with!the!right!methods!one!may!make!an!explicit!tradeoff!between!quality!and!the!stability!of!the!communities!generated!(Aynaud!&!Guillaume,!2010).!Such!an!effort!might!be!computationally!intensive.!

5 Conclusion&This!dissertation!explores!questions!of!patent!value,!holdup!effects,!and!

technology!identification:!all!basic!questions!in!the!literature!of!patent!economics.!It!does!so!with!several!previously!unexplored!tools!from!network!analytics.!A!fundamental!theme!throughout!is!the!substantial!amount!of!unused!information!in!the!patent!citation!network.!Statistical!approaches!that!restrict!themselves!to!gathering!information!about!a!patent!from!the!patent!and!its!immediate!neighbors,!while!straightforward,!leave!money!on!the!table!in!the!form!of!additional!information!that!can!pick!up!otherwise!unidentified!effects.!

In!the!case!of!patent!value,!information!beyond!raw!citation!counts!can!identify!new!effects!on!patent!valuation.!An!analysis!of!the!impact!of!centrality!on!value!suggests!a!clear!market!saturation!phenomenon.!In!the!case!of!patent!pools,!the!evidence!suggests!that!centrality!may!be!related!to!holdup!in!economic!spaces!with!complex!competing!claims.!And!patent!communities!constitute!a!new!way!to!detect!technological!groups!of!patents.!

There!are!clearly!many!paths!for!further!research.!The!two!network!tools!used!in!this!dissertation!were!node!centrality!and!community!detection.!The!path!length!between!nodes,!which!is!a!pairwise!measurement!that!relates!two!different!patents,!and!the!clustering!coefficient,!which!is!a!measurement!of!how!closely!a!patent’s!cited!or!citing!patents!cite!to!each!other,!are!different!measurements!that!would!be!a!logical!further!choice.!Furthermore,!citations!can!be!thought!of!as!being!generated!by!random!processes—for!any!given!citation,!a!counterfactual!situation!could!exist!where!the!examiner!or!applicant!found!it!appropriate!to!cite!something!else!instead.!Models!that!explicitly!treat!the!citation!as!a!stochastic!phenomenon,!such!as!exponential!random!graph!models!(Robins,!Pattison,!Kalish,!&!Lusher,!2007),!may!be!an!appropriate!tool!to!address!that.!

The!research!here!raises!questions!about!the!real!meaning!of!network!centrality.!Centrality!is!clearly!related!to!value!and!other!market!phenomena,!and!clearly!contains!information!in!the!sense!of!improving!goodness!of!a!statistical!fit.!But!the!exact!meaning!of!the!contribution!it!makes!should!be!more!clearly!identified.!

A!natural!step!for!more!research!into!community!detection!is!the!consideration!of!other!algorithms.!The!leading!eigenvector!method!lacks!tunable!parameters,!which!prevents!one!from!simply!dividing!communities!more!or!less!finely!if!the!network!appears!to!justify!it.!Other!community!detection!methods!could!both!have!different!properties!and!could!be!better!adjustable.!

While!new!measurements!improve!on!existing!tools!in!detecting!value,!the!more!interesting!question!for!research!is!finding!measurements!of!things!that!were!not!detectible!with!tools!like!citation!counts.!Stronger!identification!of!thickets,!basicness,!and!substitutes!or!complements!would!be!highly!valuable.!

! 56!

Another!direction!for!research!is!the!way!in!which!the!citation!network!has!changed!over!time.!Patent!examiner!search!engines,!law!firm!reference!management!software,!and!practitioner!habits!may!have!all!had!an!impact!on!the!network,!such!as!causing!inflation!in!citations.!One!could!also!extend!the!network!tools!to!use!words!as!a!contributing!factor!(much!like!in!web!search,!where!one!site!may!be!more!important!for!some!key!words!over!others).!

One!fundamental!question!in!understanding!citation!network!dynamics!is!how!best!to!model!citation!generation,!and!how!that!impacts!the!global!structure!of!citation!generation.!One!project!would!be!to!attempt!to!derive!an!explicit!model!for!citation!generation.!From!a!practitioner’s!point!of!view,!citations!are!not!all!equivalent;!some!are!added!by!examiners,!some!are!added!by!firm!management!software,!and!all!may!be!influenced!by!factors!such!as!patent!class,!prior!work!by!the!same!firm!or!same!assignee,!or!keyword!search!results.!A!basic!intuitive!justification!for!the!use!of!citation!counts!is!that!each!comes!from!a!patent!that!required!some!economic!effort!to!create;!this!justifies!treating!them!as!a!kind!of!vote!of!importance.!But!depending!on!which!factors!influence!citation!creation,!one!might!think!about!them!differently,!without!an!equal!weighting.!

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!

62!

7 Tables(and(Figures(Table&1.&Centrality&statistics&of&the&underlying&patents&before&adjustments&for&truncation.&Patents&are&in&the&year&range&of&1967&through&2006.&

! ! ! ! ! ! ! !Variable! Minimum! Maximum! Mean! Median!

Lower!quartile!

Upper!quartile! Std!dev!

! ! ! ! ! ! ! !Citations!received! 0! 1800! 7.5! 4! 1! 9! 13.3!PageRank!*!1,000,000! 0.0634! 435! 0.317! 0.109! 0.00695! 0.235! 1.21!Eigenvector!centrality!*!1,000,000! 0! 1! 81.8! 0.000139! 0.000009! 0.00153! 6470!Betweenness!centrality!/!1000! 0! 69900! 46.9! 0.605! 0! 12.4! 300!! !

!

63!

Table&2.&Mean&and&median&PageRank,&eigenvector,&and&betweenness&centrality&of&the&underlying&patents&by&technological&category,&before&adjustments&for&

truncation.&Patents&are&in&the&year&range&of&1967&through&2006.&

!Means&& Medians&&

! ! ! ! ! ! !

Tech%category%%PageRank%*%1,000,000%

Eigenvector%centrality%*%1,000,000%

Betweenness%centrality%/!

1000%PageRank%%*%1,000,000%

Eigenvector%centrality%*%1,000,000%

Betweenness%centrality%/!

1000%

! ! ! ! ! ! !Chemical! 0.281! 43.2! 18.0! 0.109! 0.000262! 0!Computers!&!communications! 0.438! 4.26! 134! 0.106! 0.000314! 1.08!Drugs!and!medical! 0.263! 0.501! 24.0! 0.093! 0.000246! 0.137!Electrical!&!electronic!! 0.365! 55.2! 61.0! 0.114! 0.000192! 2.45!Mechanical! 0.274! 0.999! 21.7! 0.112! 0.000034! 0.230!Other!! 0.259! 334! 15.1! 0.112! 0.000052! 0.270!!

& !

!

64!

Table&3.&Numbers&and&titles&of&highHcentrality&patents&in&the&computers&&&communication&and&drugs&&&medical&technological&fields.&

!! Grant!year!

Patent!number! Title! Assignee!

Computers!&!communications!

1981! 4255789! MicroprocessorWbased!electronic!engine!control!system! The!Bendix!Corporation!1981! 4276594! Digital!computer!with!multiWprocessor!capability!utilizing!intelligent!...! Gould!Inc.!Modicon!Division!1981! 4245314! Oxygen!sensor!qualifier! The!Bendix!Corporation!

1980! 4231097! Apparatus!for!calculating!a!plurality!of!interpolation!values! Tokyo!Shibaura!Denki!Kabushiki!Kaisha!

1981! 4263652! Oxygen!sensor!signal!conditioner! The!Bendix!Corporation!1981! 4245315! Ignition!limp!home!circuit!for!electronic!engine!control!systems! The!Bendix!Corporation!1980! 4205377! Control!system!for!internal!combustion!engine! Hitachi,!Ltd.!1980! 4213182! Programmable!energy!load!controller!system!and!methods! General!Electric!Company!1996! 5572643! Web!browser!with!dynamic!display!of!information!objects!during!linking! none!1981! 4264808! Method!and!apparatus!for!electronic!image!processing!of!documents!for!...! NCR!Corporation!

Drugs!&

!medical!

1981! 4271842! Apparatus!and!method!for!providing!multiple!ultrasonic!sector!image!displays! Smith!Kline!Instruments,!Inc.!1981! 4277560! Enzyme!immunoassays!using!immobilized!reagents!in!a!flowing!stream! Technicon!Instruments!Corporation!1982! 4308866! Infusion!controlling!apparatus!and!method! University!of!Southern!California!1980! 4217909! Directional!detection!of!blood!velocities!in!an!ultrasound!system! General!Electric!Company!1981! 4274421! Echo!sound!apparatus!including!an!oscillating!mirror!for!use!in!medical!…! C.!G.!R.!Ultra!Sonic!1981! 4266548! Apparatus!for!and!method!of!utilizing!energy!to!excise!pathological!tissue! none!1980! 4231365! Emergency!resuscitation!apparatus! none!1992! 5153827! An!infusion!management!and!pumping!system!having!an!alarm!handling!

system! OmniWFlow,!Inc.!

1980! 4232682! Physiological!parameter!measuring!system! United!States!Surgical!Corporation!1981! 4250888! Heartbeat!monitoring!process!and!device! Carl!ZeissWStiftung!

! !

!

65!

Table&4.&Numbers&and&titles&of&highHcentrality&patents&granted&in&1996&in&computers&&&communications.&

Patent!number! Title! Assignee!

5572643! Web!browser!with!dynamic!display!of!information!objects!during!linking!5555116! Liquid!crystal!display!having!adjacent!electrode!terminals!set!equal!in!length! Alps!Electric!Co.,!Ltd.!5515490! Method!and!system!for!temporally!formatting!data!presentation!in!time!…! Xerox!Corporation!5488572! Portable!computer!system!for!docking!to!an!expansion!base!unit! Compaq!Computer!Corp.!5485370! Home!services!delivery!system!with!intelligent!terminal!emulator! Transaction!Technology,!Inc.!5511160! Information!retrieval!device!for!displaying!and!directly!refreshing!the!...! HewlettWPackard!Company!5522089! Personal!digital!assistant!module!adapted!for!initiating!telephone!…! Cordata,!Inc.!5493568! Media!dependent!module!interface!for!computerWbased!conferencing!system! Intel!Corporation!5500929! System!for!browsing!a!network!resource!book!with!tabs!attached!to!pages! Taligent,!Inc.!5537223! Rotating!nonWrotationally!symmetrical!halftone!dots!for!encoding!embedded!…! Xerox!Corporation!

!! !

!

66!

Table&5.&Share&of&industries&in&patent&data&set,&with&column&percentages&(column&1).&Number&of&patents&by&industry&in&the&top&and&bottom&10%&of&citations&

(columns&2H5),&and&in&the&top&and&bottom&10%&by&betweenness&centrality&(columns&2H3&and&4H5,&respectively).&Cantralities&are&normalized&by&year&to&adjust&

for&truncation.&

! ! Low!centrality! High!centrality!!! Total! Low!

citations!High!citations!

Low!citations!

High!citations!

Chemical! 531000! 6250! 17! 2380! 415!!! 16.8%! 19.5%! 17.9%! 19.7%! 4.5%!Comp!&!Comms! 535000! 4470! 23! 1190! 4050!!! 17.0%! 13.9%! 24.2%! 9.9%! 44.1%!Drugs!&!medical! 285000! 5230! 19! 1410! 475!!! 9.0%! 16.3%! 20.0%! 11.7%! 5.2%!Electrical! 619000! 5560! 25! 2480! 2760!!! 19.6%! 17.3%! 26.3%! 20.6%! 30.1%!Mechanical! 594000! 5400! 6! 2220! 920!!! 18.8%! 16.9%! 6.3%! 18.4%! 10.0%!Other! 591000! 5120! 5! 2380! 563!!! 18.7%! 16.0%! 5.3%! 19.7%! 6.1%!Total! 3150000! 32000! 95! 12000! 9180!! 100%! 100%! 100%! 100%! 100%!

!! !

!

67!

Table&6.&FirmHyear&observation&summary&statistics&(years&1979–1998).&Centralities&(PageRank,&eigenvector,&and&betweenness&centrality)&are&normalized&by&

year&to&adjust&for&truncation.&Dollar&figures&are&in&millions&and&employees&are&in&thousands.&All&flow&variables&are&the&change&in&that&variable&(patents&owned,&

citations&received,&or&centrality&accumulated)&in&that&year.&All&stock&variables&are&the&flow&variables&summed&with&a&declining&balance&formula&and&15%&

depreciation.&

Variable% Minimum%Lower%quartile% Median%

Upper%quartile% Maximum% Mean% Std%dev%

! ! ! ! ! ! ! !Q! 0.00209! 1.36! 2! 3.34! 1920! 3.84! 15.5!Log!Q! W6.17! 0.308! 0.692! 1.21! 7.56! 0.846! 0.811!R&D!stock! 0! 4.9! 19.6! 75.6! 48200! 242! 1380!Assets! 5.02! 40.7! 126! 554! 279000! 1450! 8140!Employees! 0.1! 0.419! 1.42! 5.86! 877! 9.46! 33.5!Market!capitalization! 0! 36.3! 129! 530! 197000! 1260! 5880!Patent!flow! 0! 0! 1! 6! 1510! 15.5! 66.7!Citation!flow! 0! 0! 11! 72! 20700! 189! 836!PageRank!flow! 0! 0! 1.71! 10.1! 3240! 29.6! 142!Eigenvector!centrality!flow! 0! 0! 1.63! 9.07! 2080! 24.1! 97.8!Betweenness!flow! 0! 0! 2.26! 112! 113000! 844! 4920!Patent!stock! 0! 1.31! 6.35! 27.1! 6890! 73.5! 300!Citation!stock! 0! 12! 76! 351! 95400! 920! 3890!PageRank!stock! 0! 1.93! 11.6! 51.7! 17000! 158! 746!Eigenvector!centrality!stock! 0! 1.64! 8.99! 40.5! 9250! 118! 472!Betweenness!stock! 0! 2.5! 121! 1110! 604000! 5040! 26600!

! ! ! ! ! ! ! !Observations! 21548!! ! ! ! ! !Firms! 2452!! ! ! ! ! !! &

!

68!

Table&7.&Regression&with&Log&Q&as&dependent&variable.&Year&indicators&present&in&all&regressions.&Indicators&for&zero&R&D,&patent,&citation,&and&centrality&

stocks&are&present&for&respective&regressions.&Centralities&(PageRank,&eigenvector,&and&betweenness&centrality)&are&normalized&by&year&to&adjust&for&

truncation.&Sample:&Compustat&manufacturing&firms&during&1979H1998&with&at&least&100&employees,&$5&million&in&assets,&in&manufacturing&industries,&and&at&

least&one&patent&during&the&observation&period.&Clustered&standard&errors&in&parentheses.&

!! (1)! (2)! (3)! (4)! (5)!

! ! ! ! ! !Log!R&D!stock/assets! 0.137***!! ! ! !

!(0.009)!

! ! ! !! ! ! ! ! !Log!patent!stock/assets!

!0.0694***!

! ! !! !

(0.0082)!! ! !

! ! ! ! ! !Log!citation!stock/assets!

! !0.0922***!

! !! ! !

(0.0070)!! !

! ! ! ! ! !Log!PageRank!stock/assets!

! ! !0.0876***!

!! ! ! !

(0.0069)!!

! ! ! ! ! !Log!betweenness!stock/assets!

! ! ! !0.0409***!

! ! ! ! !(0.0042)!

! ! ! ! ! !Observations! 21548! 21548! 21548! 21548! 21548!Adjusted!RWsquared! 0.235! 0.193! 0.213! 0.209! 0.194!

! ! ! ! ! !*!p!<!0.1,!**!p!<!0.05,!***!p!<!0.01!! ! !& !

!

69!

&

Table&8.&Regression&with&Log&Q&as&dependent&variable.&Year&indicators&present&in&all&regressions.&Indicators&for&zero&R&D,&patent,&citation,&and&centrality&

stocks&are&present&for&respective&regressions.&Centralities&(PageRank,&eigenvector,&and&betweenness&centrality)&are&normalized&by&year&to&adjust&for&

truncation.&Sample:&Compustat&manufacturing&firms&during&1979H1998&with&at&least&100&employees,&$5&million&in&assets,&in&manufacturing&industries,&and&at&

least&one&patent&during&the&observation&period.&Clustered&standard&errors&in&parentheses.&

&

(1)& (2)& (3)& (4)& (5)& (6)&

! ! ! ! ! ! !Log!R&D!stock/assets! 0.137***! 0.242***! 0.209***! 0.156***! 0.144***! 0.171***!

!(0.010)! (0.021)! (0.019)! (0.009)! (0.010)! (0.011)!

! ! ! ! ! ! !Log!patent!stock/assets! 0.00700! W0.125***! W0.0854***!!

W0.00717!!

!(0.00889)! (0.023)! (0.0210)!

!(0.0119)!

!! ! ! ! ! ! !Log!citation!stock/R&D!stock!

!0.135***!

!0.0346***!

!0.0565***!

! !(0.019)!

!(0.0078)!

!(0.0082)!

! ! ! ! ! ! !Log!PageRank!stock/R&D!stock!

! !0.0983***!

! ! !! ! !

(0.0182)!! ! !

! ! ! ! ! ! !Log!PageRank!stock/citation!stock!

! ! !W0.113***!

! !! ! ! !

(0.026)!! !

! ! ! ! ! ! !Log!betweenness!stock/R&D!stock!

! ! ! !0.0132**!

!! ! ! ! !

(0.0062)!!

! ! ! ! ! ! !

!

70!

Log!betweenness!stock/citation!stock!

! ! ! ! !W0.0252***!

! ! ! ! ! !(0.0073)!

! ! ! ! ! ! !! ! ! ! ! ! !Log!assets! W0.0364***! W0.0367***! W0.0362***! W0.0308***! W0.0385***! W0.0210***!

!(0.0062)! (0.0061)! (0.0062)! (0.0061)! (0.0067)! (0.0065)!

! ! ! ! ! ! !Constant! 1.32***! 0.940***! 1.23***! 1.04***! 1.27***! 1.20***!

!(0.04)! (0.060)! (0.04)! (0.06)! (0.04)! (0.03)!

! ! ! ! ! ! !Observations! 21548! 21548! 21548! 21548! 21548! 21548!Adjusted!RWsquared! 0.241! 0.257! 0.249! 0.250! 0.242! 0.250!

! ! ! ! ! ! !*!p!<!0.1,!**!p!<!0.05,!***!p!<!0.01!! ! ! !!

! !

!

71!

Table&9.&U.S.&Patent&classes&of&MPEGH2&pool&patents.&

US!patent!class! Class!title!Number!of!patents! Percentage!

341! Coded!data!generation!or!conversion! 4! 4.2!348! Television! 19! 19.8!358! Facsimile!and!static!presentation!processing! 1! 1.0!369! Dynamic!information!storage!or!retrieval! 3! 3.1!370! Multiplex!communications! 7! 7.3!375! Pulse!or!digital!communications! 48! 50.0!380! Cryptography! 1! 1.0!382! Image!analysis! 5! 5.2!386! Motion!video!signal!processing!for!recording!or!reproducting! 5! 5.2!

709!Elec.!computers!and!digital!processing!systems:!multicomputer!data!transferring! 1! 1.0!

714! Error!detection/correction!and!fault!detection/recovery! 2! 2.1!Total! !! 96! 100!! !

!

72!

!Table&10.&MPEGH2&pool&patent&grant&years.&

Grant!year!

Number!of!patents! Percentage!

1983! 1! 1.0!1987! 2! 2.1!1989! 6! 6.3!1990! 5! 5.2!1991! 5! 5.2!1992! 5! 5.2!1993! 6! 6.3!1994! 8! 8.3!1995! 16! 16.7!1996! 11! 11.5!1997! 8! 8.3!1998! 6! 6.3!1999! 8! 8.3!2000! 3! 3.1!2001! 3! 3.1!2004! 2! 2.1!2006! 1! 1.0!

Total! 96! 100!!

! !

!

73!

!Table&11.&Number&of&elements&and&description&of&each&comparison&group.&

Comparison!set! N!

Citations!to/from!MPEG!required! Classifications!

MPEGW2!pool! !96!!

! !Universe!1! !1,884!! Yes! Class!341,!348,!358,!369,!370,!375,!382,!386,!714!

Universe!2! !1,954!! Yes!NBER!subcategories!21!(communications),!22!(computer!software!&!hardware),!24!(information!storage),!49!(miscellaneous!elec.)!

Universe!3! !2,082!! Yes!NBER!categories!2!and!4!(computers!&!communications;!electrical!and!electronic)!

Universe!4!!

138,504!! No! Class!341,!348,!358,!369,!370,!375,!382,!386,!714!

Universe!5!!

411,425!! No!NBER!subcategories!21!(communications),!22!(computer!software!&!hardware),!24!(information!storage),!49!(miscellaneous!elec.)!

Universe!6!!

887,111!! No!NBER!categories!2!and!4!(computers!&!communications;!electrical!and!electronic)!

!! !

!

74!

Table&12.&Descriptive&statistics&on&regression&variables&for&pool&patents&and&each&comparison&group.&

!! Variable! Mean! Median! St!dev! IQR! Min! Max!MPEG! Log!betweenness! 10.86! 10.84! 2.17! 2.99! 5.20! 15.29!!! Log!PageRank! W14.66! W14.79! 1.32! 1.84! W16.57! W10.62!

!!Log!citations!received! 2.76! 2.89! 1.26! 1.74! 0.00! 5.07!

!!! ! ! ! ! ! !Universe!1! Log!betweenness! 11.13! 11.21! 1.97! 2.65! 0.42! 16.20!

!! Log!PageRank! W15.25! W15.65! 1.32! 1.83! W16.57! W10.43!

!!Log!citations!received! 2.28! 2.30! 1.25! 1.79! 0.00! 5.52!

!!! ! ! ! ! ! !Universe!2! Log!betweenness! 11.26! 11.31! 1.95! 2.61! 3.62! 17.00!

!! Log!PageRank! W15.14! W15.54! 1.29! 1.78! W16.57! W10.20!

!!Log!citations!received! 2.31! 2.40! 1.23! 1.79! 0.00! 5.52!

!!! ! ! ! ! ! !Universe!3! Log!betweenness! 11.30! 11.37! 1.96! 2.61! 3.62! 17.00!

!! Log!PageRank! W15.17! W15.56! 1.28! 1.72! W16.57! W10.20!

!!Log!citations!received! 2.30! 2.30! 1.23! 1.79! 0.00! 5.52!

!!! ! ! ! ! ! !Universe!4! Log!betweenness! 10.25! 10.41! 2.16! 2.71! W1.61! 17.64!

!! Log!PageRank! W15.77! W16.12! 0.95! 1.24! W16.57! W9.95!

!!Log!citations!received! 1.78! 1.79! 1.16! 1.87! 0.00! 6.82!

! !

!

75!

Universe!5! Log!betweenness! 10.00! 10.26! 2.43! 3.04! W2.40! 18.06!!! Log!PageRank! W15.62! W15.88! 0.93! 1.20! W16.57! W9.48!

!!Log!citations!received! 1.85! 1.79! 1.13! 1.54! 0.00! 6.82!

!!! ! ! ! ! ! !Universe!6! Log!betweenness! 9.55! 9.85! 2.58! 3.28! W3.09! 18.06!

!! Log!PageRank! W15.66! W15.92! 0.90! 1.17! W16.57! W9.20!

!!Log!citations!received! 1.77! 1.79! 1.11! 1.47! 0.00! 7.50!

! !

!

76!

!Table&13.&THtests&comparing&average&betweenness&and&PageRank&centrality&scores&between&MPEG&pool&and&nonHMPEG&pool&patents&in&indicated&group.&

Universes&are&defined&as&in&Table&11.&The&result&shown&is&the&pHvalue&and&a&sign&showing&whether&the&betweenness&centrality&or&PageRank&for&the&given&

universe&of&patents&is&larger&(+)&or&smaller&(H)&than&the&same&figure&for&the&MPEG&pool.&&

Sample! N!

Log!betweenness!centrality! Std!err!

tWtest!pWvalue!and!sign!(MPEG!sample!versus!universe)!

Log!PageRank!centrality! Std!err!

tWtest!pWvalue!and!sign!(MPEG!sample!versus!universe)!

! ! ! ! ! ! ! !MPEG!pool!patents! 87! 10.81! 0.237!

!W14.57! 0.141!

!Universe!1! 1501! 11.15! 0.0503! 0.11!(+)! W15.03! 0.0335! 0.0014!(W)!Universe!2! 1716! 11.28! 0.0468! 0.028!(+)! W15.05! 0.0307! 0.0006!(W)!Universe!3! 1836! 11.32! 0.0453! 0.017!(+)! W15.09! 0.0293! 0.0002!(W)!Universe!4! 102141! 10.25! 0.0068! 0.016!(W)! W15.50! 0.00300! <!0.0001!(W)!Universe!5! 356688! 10.00! 0.0041! 0.0019!(W)! W15.50! 0.00154! <!0.0001!(W)!Universe!6! 751981! 9.55! 0.0030! <!0.0001!(W)! W15.53! 0.00102! <!0.0001!(W)!

!! !

!

77!

Table&14.&Probit&with&membership&in&MPEG&patent&pool&as&dependent&variable.&Year&indicators&included.&Base&category&is&computers&and&communications&

(the&electrical&and&electronics&variable&shown&is&in&comparison&to&computers&and&communications).&Standard&errors&in&parentheses.&Universe&1&indicated&

patents&related&to&the&MPEG&pool&based&on&membership&in&certain&related&USPC&classes&and&that&cited&to&or&from&MPEG&pool&patents;&universe&2&was&defined&

similarly&based&on&technological&subcategory;&universe&3&based&on&technological&category;&and&universes&4,&5,&and&6&defined&similarly&without&the&

requirement&of&citation&to&or&from&pool&patents.&

Reference!universe! 1! 2! 3! 4! 5! 6!

! ! ! ! ! ! !Log!Betweenness! W0.195***! W0.195***! W0.205***! W0.0379! W0.003! 0.004!

! (0.041)! (0.039)! (0.038)! (0.020)! (0.017)! (0.016)!! ! ! ! ! ! !Log!citations! 0.216**! 0.221**! 0.231**! 0.203***! 0.165***! 0.140***!

! (0.080)! (0.073)! (0.073)! (0.042)! (0.038)! (0.035)!! ! ! ! ! ! !Electrical!&!electronics! W0.154! W0.091! W0.076! 0.091! 0.195**! W0.266***!

! (0.128)! (0.125)! (0.125)! (0.080)! (0.071)! (0.064)!! ! ! ! ! ! !Constant! 0.147! 0.025! 0.056! W3.058***! W3.726***! W3.786***!!! (0.391)! (0.370)! (0.365)! (0.198)! (0.172)! (0.165)!N% 1333! 1535! 1638! 75150! 273571! 572704!*!p!<!0.05,!**!p!<!0.01,!***!p!<!0.001!

!! !

!

78!

Table&15.&Probit&with&membership&in&MPEG&patent&pool&as&dependent&variable.&Year&indicators&included.&Base&category&is&computers&and&communications&

(the&electrical&and&electronics&variable&shown&is&in&comparison&to&computers&and&communications).&Standard&errors&in&parentheses.&Universe&1&indicated&

patents&related&to&the&MPEG&pool&based&on&membership&in&certain&related&USPC&classes&and&that&cited&to&or&from&MPEG&pool&patents;&universe&2&was&defined&

similarly&based&on&technological&subcategory;&universe&3&based&on&technological&category;&and&universes&4,&5,&and&6&defined&similarly&without&the&

requirement&of&citation&to&or&from&pool&patents.&

Reference!universe! 1! 2! 3! 4! 5! 6!

! ! ! ! ! ! !Log!PageRank! 0.047! 0.046! 0.076! 0.350***! 0.359***! 0.339***!

! (0.114)! (0.110)! (0.108)! (0.067)! (0.058)! (0.055)!! ! ! ! ! ! !Log!citations! W0.047! W0.043! W0.066! W0.085! W0.085! W0.086!

! (0.097)! (0.093)! (0.091)! (0.056)! (0.049)! (0.046)!! ! ! ! ! ! !Electrical!&!electronics! W0.145! W0.069! W0.052! 0.125! 0.231**! W0.259***!

! (0.125)! (0.122)! (0.121)! (0.079)! (0.072)! (0.064)!! ! ! ! ! ! !Constant! W0.576! W0.741! W0.281! 2.583*! 2.320*! 1.970*!!! (1.939)! (1.867)! (1.843)! (1.140)! (0.987)! (0.931)!N% 1342! 1545! 1650! 76165! 279299! 589661!*!p!<!0.05,!**!p!<!0.01,!***!p!<!0.001!

!!

! !

!

79!

Table&16.&Probit&with&membership&in&MPEG&patent&pool&as&dependent&variable.&Year&indicators&included.&Base&category&is&computers&and&communications&

(the&electrical&and&electronics&variable&shown&is&in&comparison&to&computers&and&communications).&Standard&errors&in&parentheses.&Universe&1&indicated&

patents&related&to&the&MPEG&pool&based&on&membership&in&certain&related&USPC&classes&and&that&cited&to&or&from&MPEG&pool&patents;&universe&2&was&defined&

similarly&based&on&technological&subcategory;&universe&3&based&on&technological&category;&and&universes&4,&5,&and&6&defined&similarly&without&the&

requirement&of&citation&to&or&from&pool&patents.&

Reference!universe! 1!! 2!! 3!! 4!! 5!! 6!!

Log!Betweenness! W0.210***! W0.209***! W0.219***! W0.0645**! W0.023! W0.016!

! (0.042)! (0.040)! (0.039)! (0.021)! (0.017)! (0.016)!! ! ! ! ! ! !Log!PageRank! 0.184! 0.175! 0.197! 0.393***! 0.374***! 0.352***!

! (0.117)! (0.113)! (0.112)! (0.069)! (0.059)! (0.056)!! ! ! ! ! ! !Log!citations! 0.107! 0.119! 0.115! W0.030! W0.064! W0.073!

! (0.104)! (0.099)! (0.098)! (0.059)! (0.052)! (0.049)!! ! ! ! ! ! !Electrical!&!electronics! W0.168! W0.105! W0.093! 0.128! 0.224**! W0.268***!

! (0.129)! (0.126)! (0.126)! (0.080)! (0.072)! (0.065)!! ! ! ! ! ! !Constant! 3.389! 3.090! 3.489! 3.771**! 2.747**! 2.307*!!! (2.104)! (2.014)! (1.988)! (1.198)! (1.023)! (0.972)!N% 1333! 1535! 1638! 75150! 273571! 572704!*!p!<!0.05,!**!p!<!0.01,!***!p!<!0.001!

!

80!

Table&17.&Probit&with&PRK&membership&as&dependent&variable.&Year&indicators&included.&Standard&errors&in&parentheses.&Universe&1&indicated&patents&

related&to&the&PRK&pool&based&on&membership&in&certain&related&USPC&classes&and&that&cited&to&or&from&PRK&pool&patents;&universe&2&was&defined&similarly&

based&on&technological&subcategory;&universe&3&based&on&technological&category;&and&universes&4,&5,&and&6&defined&similarly&without&the&requirement&of&

citation&to&or&from&pool&patents.&

Reference!universe! 1! 2! 3! 4! 5! 6!

!! !! !! !! !! !! !!Log!Betweenness! W0.410*! W0.423**! W0.430**! W0.060! W0.100**! W0.057!

! (0.183)! (0.145)! (0.145)! (0.050)! (0.034)! (0.029)!! ! ! ! ! ! !Log!PageRank! W0.099! 0.400! 0.353! 0.015! 0.164! W0.039!

! (0.730)! (0.594)! (0.579)! (0.222)! (0.153)! (0.128)!! ! ! ! ! ! !Log!citations! 1.395*! 1.503**! 1.553**! 0.378*! 0.457***! 0.594***!

! (0.653)! (0.522)! (0.518)! (0.174)! (0.136)! (0.126)!! ! ! ! ! ! !Constant! W3.713! 3.449! 2.631! W3.545! W1.595! W5.695*!!! (12.960)! (10.620)! (10.450)! (3.896)! (2.785)! (2.319)!N% 64! 105! 113! 4680! 31978! 61179!adj.!R2! ! ! ! ! ! !*!p!<!0.05,!**!p!<!0.01,!***!p!<!0.001!

!! !

!

81!

Table&18.&Sizes&of&leading&eigenvector&communities&and&USPC&classes&in&the&NBER&patent&data&file.&

!Number! Min!

25th!percentile! Median!

75th!percentile! Max! Mean! IQR! St!Dev!

Community!size! 429! 1! 62! 1830! 6980! 324775! 7350! 6920! 20900!USPC!class!size! 721! 1! 4! 979! 5530! 59986! 4370! 5520! 7770!!!Table&19.&Titles&and&priority&years&of&ten&randomly&selected&patents&in&community&102&(which&contains&58,228&members).&

Priority!year! Patent!number! Title!1975! 4043142! Dampening!roll!cover!1987! 4816328! Breathable,!nonWlinting!laminate!1992! 5156399! Golf!gloveWsupported!golf!swing!aid!1992! 5271904! Apparatus!for!sensing!a!chemical!property!of!a!spray!1993! 5350471! Production!of!crossWlaminated!film!from!tube!1992! 5427597! Layered!air!filter!medium!having!improved!efficiency!and!pleatability!1988! 5502120! MeltWextruded!monofilament!comprised!of!a!blend!of!polyethylene!

terephthalate!and!a!thermoplastic!polyurethane!1995! 5704506! Container!having!an!attached!separate!handle!1998! 6401583! Arbitrarily!positioned!lateral!perforation!forming!apparatus!for!form!printing!machine!2001! 6812324! Method!for!preparing!nylon!6!copolymer!containing!sulfonate!comonomers!!! !

!

82!

!Table&20.&Titles&and&priority&years&of&ten&randomly&selected&patents&in&community&172&(which&contains&123,767&members).&

Priority!year! Patent!number! Title!1984! 4649398! Motor!driven!extensible!rod!antenna!for!vehicles!with!position!control!circuit!1989! 5012070! Vehicle!preheating!system!using!existing!vehicle!heating!system!1990! 5077707! Time!setting!device!for!an!alarm!clock!1991! 5173569! Digital!delay!detonator!1995! 5747342! Methods!and!apparatus!for!monitoring!and!controlling!PH!phosphate!and!sodium!to!

phosphate!ratio!in!boiler!systems!operating!with!captive!alkalinity!1997! 6022299! Gripping!device!for!cable!pulley!exercise!system!1999! 6162153! Exercise!machine!with!user!interface!element!operable!in!multiple!directions!

against!bodyweight!resistance!1995! 6188236! Arrangement!and!method!relating!to!digital!information!in!superconducting!circuits!1999! 6501108! Semiconductor!integrated!circuit!2002! 6671595! Vehicle!side!slip!angle!estimation!using!dynamic!blending!and!considering!vehicle!

attitude!information!!! !

!

83!

!Table&21.&Titles&and&priority&years&of&ten&randomly&selected&patents&in&community&230&(which&contains&45,920&members).&

Priority!year!

Patent!number! Title!

1980! 4527933! Spike!plate!and!method!and!device!for!manufacturing!it!1987! 4894888! Device!for!temporarily!connecting!the!ends!of!two!structures!of!which!at!least!one!is!

flexible!1989! 5065558! Prefabricated!modular!building!construction!system!1994! 5630876! Coating!product!sprayer!device!1999! 6095745! Wheel!lift!caddy!1996! 6153965! Piezoelectric!step!motor!1999! 6308467! Wall!positioning!and!bracing!apparatus!and!method!1997! 6406211! Connecting!device!for!a!bearing!arm!1992! 6720409! AntiWhuman!influenza!virus!antibody!1998! 6893640! Outer!membrane!protein!of!Ehrlichia!canis!and!Ehrlichia!chaffeensis!!! !

!

84!

Table&22.&Titles&and&priority&years&of&ten&randomly&selected&patents&in&community&386&(which&contains&250&members).&

Priority!year! Patent!number! Title!1990! 5282058! Facsimile!device!having!improved!printing!process!with!cut!paper!1992! 5649033! Image!processing!apparatus!outputting!desired!image!irrespective!of!directions!of!

original!and!output!paper!1990! 5079419! Horizon!sensor!compensation!for!radiance!variations!1999! 6809843! Virtual!whiteboard!1980! 4554638! Display!device!including!apparatus!for!rotating!the!image!to!be!displayed!1980! 4413323! Digital!symbol!generator!with!symbol!error!checking!1991! 5384645! Image!rotating!apparatus!1984! 4665314! Method!and!circuit!for!processing!the!signals!of!an!earthWhorizon!sensor!in!an!earth!

satellite!1990! 5418896! Skew!processing!circuit!and!method!of!calculating!a!preset!value!for!the!same!1986! 4893257! Multidirectional!scan!and!print!capability!!! !

!

85!

Table&23.&Titles&and&priority&years&of&ten&randomly&select&patents&that&are&each&members&of&a&singleHmember&community.&

Priority!year! Patent!number! Title!1976! 4073556! Rigid!mobile!cabinet!for!audioWvisual!aids!1978! 4230652! Method!of!repairing!a!refractory!structure!1983! 4605188! Apparatus!for!seating!a!terminal!or!similar!office!equipment!1986! 4841145! Apparatus!for!preparing!sample!solution!for!infrared!spectrophotometer!and!

method!of!analyzing!sample!solution!1989! 5162866! Apparatus!and!method!for!inspecting!IC!leads!1995! 5687353! Merging!data!using!a!merge!code!from!a!lookWup!table!and!performing!ECC!

generation!on!the!merged!data!1999! 6003922! Arrangement!for!mounting!a!spare!tire!and!a!license!plate!carrier!to!a!motor!vehicle!1997! 6843000! Shoe!outer!sole,!method!for!its!manufacture,!and!mold!therefor!2002! 6910114! Adaptive!idle!timer!for!a!memory!device!2002! 7117410! Distributed!failure!analysis!memory!for!automatic!test!equipment!!! !

!

86!

Table&24.&ChiHsquared&test&of&relation&between&selected&communities&and&membership&in&class&977&(related&to&nanotechnology)&for&patents&granted&before&

creation&of&class&977.&Community&numbers&are&included&for&reference&but&are&not&significant.&

!In!nanotechnology!class!(977)!after!creation!

!Community! Out! In! Total!5! 1,047! 21! 1,068!22! 3,895! 35! 3,930!23! 7,626! 234! 7,860!28! 1,024! 7! 1,031!41! 40,465! 732! 41,197!43! 8,713! 35! 8,748!44! 2,703! 40! 2,743!172! 5,748! 8! 5,756!305! 25,303! 85! 25,388!

Total! 96,524! 1197! 97,721!

! ! ! !Chi2:! 587!!

Pr:!<!0.001!!

! !

!

87!

Table&25.&Probit&regression&with&reclassification&into&class&977,&related&to&nanotechnology,&as&dependent&variable,&and&citations&and&indicators&for&selected&

communities&and&USPC&classes.&Standard&errors&in&parentheses.&

!! (1)! (2)! (3)! (4)! (5)! (6)!! ! ! ! ! ! !Citations! ! ! ! 0.00130**! 0.00277***! 0.00116*!! ! ! ! (0.00042)! (0.00038)! (0.00047)!! ! ! ! ! ! !Communities! ! ! ! ! ! !22! W0.309**! ! 0.560***! W0.307**! ! 0.563***!! (0.11)! ! (0.12)! (0.11)! ! (0.12)!! ! ! ! ! ! !23! 0.177! ! 0.266**! 0.181! ! 0.269**!! (0.09)! ! (0.10)! (0.09)! ! (0.10)!! ! ! ! ! ! !28! W0.407*! ! W0.257! W0.402*! ! W0.249!! (0.16)! ! (0.16)! (0.16)! ! (0.16)!! ! ! ! ! ! !41! W0.0414! ! 0.609***! W0.036! ! 0.615***!! (0.09)! ! (0.10)! (0.09)! ! (0.10)!! ! ! ! ! ! !43! W0.591***! ! W0.257*! W0.585***! ! W0.250*!! (0.11)! ! (0.12)! (0.11)! ! (0.11)!! ! ! ! ! ! !44! W0.12! ! W0.327**! W0.112! ! W0.319**!! (0.11)! ! (0.12)! (0.11)! ! (0.12)!! !

!

88!

172! W0.930***! ! W0.866***! W0.918***! ! W0.856***!! (0.14)! ! (0.15)! (0.14)! ! (0.15)!! ! ! ! ! ! !305! W0.651***! ! W0.609***! W0.631***! ! W0.592***!! (0.10)! ! (0.10)! (0.10)! ! (0.10)!USPC!classes! ! ! ! ! ! !250! ! W0.197***! W0.385***! ! W0.205***! W0.386***!! ! (0.05)! (0.06)! ! (0.05)! (0.06)!! ! ! ! ! ! !257! ! W0.655***! W1.374***! ! W0.670***! W1.376***!! ! (0.05)! (0.06)! ! (0.05)! (0.06)!! ! ! ! ! ! !369! ! 0.481***! W0.0469! ! 0.475***! W0.0473!! ! (0.06)! (0.07)! ! (0.06)! (0.07)!! ! ! ! ! ! !423! ! W0.274***! W0.326***! ! W0.273***! W0.327***!! ! 0.0656! 0.0764! ! (0.07)! (0.08)!! ! ! ! ! ! !424! ! W0.119**! W0.407***! ! W0.132**! W0.409***!! ! (0.04)! (0.05)! ! (0.04)! (0.05)!! ! ! ! ! ! !435! ! W0.712***! W0.822***! ! W0.724***! W0.823***!! ! (0.05)! (0.06)! ! (0.05)! (0.06)!! ! ! ! ! ! !438! ! W0.832***! W1.607***! ! W0.854***! W1.610***!! ! (0.05)! (0.06)! ! (0.05)! (0.06)!! !

!

89!

850! ! 2.190***! 1.801***! ! 2.168***! 1.795***!! ! (0.08)! (0.09)! ! (0.08)! (0.09)!! ! ! ! ! ! !Constant! W2.061***! W1.926***! W1.705***! W2.085***! W1.946***! W1.724***!!! (0.09)! (0.03)! (0.10)! (0.09)! (0.03)! (0.10)!N% 97721! 97721! 97721! 97708! 97708! 97708!adj.!R2! ! ! ! ! ! !*!p!<!0.05,!**!p!<!0.01,!***!p!<!0.001!

! ! ! ! !! !

!

90!

Table&26.&Regression&with&Log&Q&as&dependent&variable.&Year&indicators&present&in&all&regressions.&Indicators&for&zero&R&D,&patent,&citation,&and&centrality&

stocks&are&present&for&respective&regressions.&Sample:&Compustat&manufacturing&firms&during&1979H1998&with&at&least&100&employees,&$5&million&in&assets,&in&

manufacturing&industries,&and&at&least&one&patent&during&the&observation&period.&Clustered&standard&errors&in&parentheses.&

!! (1)! (2)! (3)! (4)! (5)!Log!R&D!stock/assets! 0.129***! 0.128***! 0.129***! 0.128***! 0.129***!

!(0.010)! (0.009)! (0.010)! (0.009)! (0.009)!

! ! ! ! ! !Log!patent!stock/assets! 0.0552***! 0.0534***! 0.0553***! 0.0539***! 0.0579***!

!(0.0076)! (0.0075)! (0.0076)! (0.0075)! (0.0076)!

! ! ! ! ! !Log!citation!community!concentration! 0.175***!

!0.216***!

!0.122***!

!(0.017)!

!(0.040)!

!(0.027)!

! ! ! ! ! !(Log!citation!community!concentration)^2!

! !0.0131!

! !! ! !

(0.0114)!! !

! ! ! ! ! !Log!US!class!concentration!!

0.166***!!

0.251***! 0.0723***!

! !(0.018)!

!(0.039)! (0.0276)!

! ! ! ! ! !(Log!US!class!concentration)^2!! ! !

0.0280***!!

! ! ! !(0.0108)!

!! ! ! ! ! !Log!assets! 0.00954! 0.00900! 0.00830! 0.00709! 0.0153*!

!(0.00835)! (0.00860)! (0.00848)! (0.00867)! (0.0088)!

! ! ! ! ! !Constant! 1.484***! 1.429***! 1.510***! 1.479***! 1.475***!

!(0.042)! (0.041)! (0.048)! (0.046)! (0.042)!

&

! 91!

Figure'1.'Illustration'of'a'small'citation'network.'Each'circle'indicates'a'node'in'the'network'and'each'arrow'indicates'a'directional'citation,'the'arrow'pointing'from'the'citing'node'to'the'cited'node.'

'

! '

! 92!

'

Figure'2.'Distribution'by'industry'of'log'betweenness'centrality'in'patents'granted'in'1998.'Centrality'was'normalized'by'year'to'adjust'for'truncation.'

!

! 93!

Figure'3.'Distribution'of'log'betweenness'centrality'among'patents'when'divided'into'four'quartiles'by'citation'count.'Centrality'was'normalized'by'year'to'adjust'for'truncation.'

!

! 94!

Figure'4.'This'figure'is'based'on'centrality'stocks'(discounted'at'15%)'for'firms'that'were'granted'at'least'3'patents'in'1998.'It'shows'the'distribution'over'companies'of'average'centrality,'with'companies'divided'into'groups'by'portfolio'size.'Centrality'was'normalized'by'year'to'adjust'for'truncation.'

!

! 95!

Figure'5.'Distribution'of'betweenness'centrality'over'the'portfolios'of'selected'medical'and'pharmaceutical'companies.'Centrality'was'normalized'by'year'to'adjust'for'truncation.'

!! !

! 96!

Figure'6.'Distribution'of'betweenness'centrality'over'the'portfolios'of'selected'ITC'companies.'Centrality'was'normalized'by'year'to'adjust'for'truncation.'

!! !

! 97!

!Figure'7.'Distribution'of'betweenness'centrality'over'the'portfolios'of'selected'companies.'Centrality'was'normalized'by'year'to'adjust'for'truncation.'

!! !

! 98!

!Figure'8.'Median'PageRank'by'year'of'patent,'before'normalizing'by'year.'Patents'are'in'the'year'range'1967'through'2006.'

!Figure'9.'Mean'PageRank'by'year'of'patent,'before'normalizing'by'year.'Patents'are'in'the'year'range'1967'through'2006.'

!

0!

0.0000001!

0.0000002!

0.0000003!

0.0000004!

0.0000005!

0.0000006!

0.0000007!

1967!

1969!

1971!

1973!

1975!

1977!

1979!

1981!

1983!

1985!

1987!

1989!

1991!

1993!

1995!

1997!

1999!

2001!

2003!

2005!

0!0.0000002!0.0000004!0.0000006!0.0000008!0.000001!0.0000012!0.0000014!0.0000016!0.0000018!0.000002!

1967!

1969!

1971!

1973!

1975!

1977!

1979!

1981!

1983!

1985!

1987!

1989!

1991!

1993!

1995!

1997!

1999!

2001!

2003!

2005!

! 99!

Figure'10.'Median'eigenvector'centrality'by'year'of'patent,'before'normalizing'by'year.'Patents'are'in'the'year'range'1967'through'2006.'

!Figure'11.'Mean'eigenvector'centrality'by'year'of'patent,'before'normalizing'by'year.'Patents'are'in'the'year'range'1967'through'2006.'

!

0.00E+00!

5.00E/11!

1.00E/10!

1.50E/10!

2.00E/10!

2.50E/10!

3.00E/10!

1967!

1969!

1971!

1973!

1975!

1977!

1979!

1981!

1983!

1985!

1987!

1989!

1991!

1993!

1995!

1997!

1999!

2001!

2003!

2005!

0.00E+00!5.00E/05!1.00E/04!1.50E/04!2.00E/04!2.50E/04!3.00E/04!3.50E/04!4.00E/04!

1967!

1969!

1971!

1973!

1975!

1977!

1979!

1981!

1983!

1985!

1987!

1989!

1991!

1993!

1995!

1997!

1999!

2001!

2003!

2005!

! 100!

Figure'12.'Median'betweenness'by'year'of'patent,'before'normalizing'by'year.'Patents'are'in'the'year'range'1967'through'2006.'

!Figure'13.'Mean'betweenness'by'year'of'patent,'before'normalizing'by'year.'Patents'are'in'the'year'range'1967'through'2006.'

!

0!

500!

1000!

1500!

2000!

2500!

3000!1967!

1969!

1971!

1973!

1975!

1977!

1979!

1981!

1983!

1985!

1987!

1989!

1991!

1993!

1995!

1997!

1999!

2001!

2003!

2005!

0!10000!20000!30000!40000!50000!60000!70000!80000!90000!

1967!

1969!

1971!

1973!

1975!

1977!

1979!

1981!

1983!

1985!

1987!

1989!

1991!

1993!

1995!

1997!

1999!

2001!

2003!

2005!