Page 51 - Intellectual Property Disputes

In other words, elasticity reveals how much the quantity demanded for a product varies with a change in
price.

The interrelationship between price elasticity and price erosion is apparent in 3M Co. v. Johnson &
Johnson. In that case, the special master ruled that the "vigorous price competition" between 3M and
Johnson & Johnson had caused a reduction in the price of the infringed product during the infringement
period, and that absent the competition, 3M would have been able to raise the price of the product.
However, the court found that 3M would have contracted the size of the market as a result of the price
increases. fn 86

In its Crystal Semiconductor decision, the court addressed the law of demand and price elasticity,
quoting the following excerpt from Paul Samuelson’s text, Economics: fn 87

According to the law of demand, consumers will almost always purchase fewer units of a
product at a higher price than at a lower price, possibly substituting other products. For example,
if substitution of a product was impossible and the product was a necessity, elasticity of demand
would be zero—meaning consumers would purchase the product at identical rates even when the
price increases. This very rare type of market is called inelastic. On the other side of the
spectrum, if any price increase would eradicate demand, elasticity of demand would be infinite—
meaning consumers would decline to purchase another single product if the price increases by
any amount. This very rare type of market is called perfectly elastic. fn 88

The qualified expert can use a variety of tools from both statistics and economics to determine the price
elasticity of demand for a product.

Market Analysis of Infringing Product

An examination of the market that the plaintiff’s product serves is required to assess the merits of a price
erosion claim. The number of competitors in a given market influences the prices established in that
market, with price erosion easier to measure in two-supplier markets than in multi-supplier markets.
However, an intellectual property owner cannot merely assume that it would capture the entire market
absent the infringement simply because it operates in a two-supplier market. Further, market size can be
affected by a number of issues. For example, the defendant may contend that it had expanded the market
by entering it with a lower-priced infringing product, negating any price erosion claim. fn 89

The intellectual property owner also cannot assume that the infringer would be absent from the market
absent the infringement, especially if the infringer sells multiple products, only one of which infringes.
In such a case, the infringer may affect the size of the market through (a) discounting similar model
products, (b) adding features to existing products to entice customers, or (c) designing around the patent
and offering a new product.

fn 86 3M Co. v. Johnson and Johnson, 976 F.2d 1559, 1579 (Fed. Cir. 1992).

fn 87 Paul Samuelson, Economics, 11th ed. (1980), 53–55.

fn 88 Crystal Semiconductor Corp. vs. TriTech Microelectronics Int’l, Inc., 246 F. 3d 1336, 1359 (Fed. Cir. 2001). In Crystal
Semiconductor, the Federal Circuit indicated that the "patentee’s price erosion theory must account for the nature, or definition, of the
market . . . and the effect of the hypothetical increased price on the likely number of sales at that price in the market."

fn 89 R. Weil, M. Wagner, and P. Frank, eds., Litigation Services Handbook, 3d ed. (New York: John Wiley and Sons, Inc., 2001), 30.

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