Page 52 - Intellectual Property Disputes

In a market in which the intellectual property holder and infringer are two competitors among many,
price erosion may be much more difficult to prove or measure. In a market with a large number of
competing products, price is much less influenced by the actions of a single competitor; rather, the entire
market acts to set the price. As more and more firms compete in a market, each may find it harder to
raise prices and avoid losing sales to other firms. fn 90

Price erosion may also be claimed on products that are serving two different markets. Identifying
differences in the markets served by the infringing product and the intellectual property owner’s product
can reveal the factors that influence price in each of those markets.

Substitutes and New Product Entrants

Potential substitutes for the infringed product from its own segment and competing industries should be
examined with regard to price erosion. Substitutes that limit the potential returns of an industry by
placing a ceiling on the prices that firms in that industry can profitably charge fn 91 can diminish or
invalidate a price erosion claim.

The threat of new entrants into the infringed product’s industry should also be examined. "New entrants
to an industry bring new capacity, the desire to gain market share and often substantial resources. Prices
can be bid down or incumbents’ costs inflated as a result, reducing profitability." fn 92 The likelihood of
new entrants into an industry may have an effect on the price for an infringed product. This factor
should be considered in assessing potential price erosion. Conversely, barriers to entry into an industry
or a market may simplify an argument for price erosion.

Power of Suppliers and Buyers

Suppliers and buyers may influence the price of an infringed product. With respect to buyers, factors
that may influence price include (a) the percentage of total sales an individual buyer represents to a
seller and (b) the ability of buyers to easily switch to another product. fn 93 If buyers of the product that
suffered price erosion have significant market power, their impact on the market and price of the
infringed product should be considered; the lower price may have come from buyer power, not
additional competition. Similarly, the power of suppliers in the creation of the infringed product may be
examined. fn 94

The switching costs of the buyer may also be considered. If the buyer’s costs of switching from the
patented technology to a different technology are significant, the intellectual property holder may have a
captive market. In such a case, prices could be substantially increased without affecting demand.

fn 90 R. Pindyck and D. Rubinfeld, Microeconomics, 5th ed. (Upper Saddle River, NJ: Prentice Hall, 1998), 345.

fn 91 M. Porter, Competitive Strategy (New York: Macmillan Publishing, 1980), 23.

fn 92 Id., 7.

fn 93 Id., 25.

fn 94 Id., 28.

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