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23 IPL Newsl. 1 (2004-2005)

handle is hein.journals/iprolane23 and id is 1 raw text is: 


        Lost Profits Damages

When Infringement Raises

              Patentee's Prices

                  I. Introduction
                     Price effects in the form of price
                  erosion have long been recognized
                  as a valid component of lost profits
                  damages. In recent years, courts
                  have even begun to recognize that
   I 9  n   h     coherent economic analysis is nec-
                  essary to accurately determine lost
   Phillip Johnson profits with   price  erosion.
                  However, there appears to be little
                  awareness that the opposite price
                  effect-an increase-is a real pos-
                  sibility. The entry of an infringing
                  product may result in higher prices
                  charged by the patentee. Experts
                  undertaking lost profits damages
                  analysis in patent infringement
                  cases need to evaluate market cir-
     Tessie Su    cumstances to determine whether
                   this effect is a possibility and, when
necessary, incorporate the price effects into their analy-
ses. Failure to do so could lead to a result that overstates
the plaintiff's damages.
   Generally accepted economic theory provides several
situations in which an incumbent firm might rationally
raise its price when a competing product enters the mar-
ket. In these situations, an incumbent firm surrenders the
segment of the market where it is most vulnerable to the
entrant and, at the same time, increases price to the seg-
ment in which its position is strong. This strategy can be
more profitable than can lowering prices to all customers
if there exists a sufficiently large number of consumers
who are not price sensitive (e.g., are brand-loyal). When
   Phillip Johnson is an economist at Econ One Research Inc.
Dr. Johnson was previously an assistant professor at the Instituto
Tecnol[gico Aut6nomo de Mdxico. He con be reached at
pjohnson @ ecnone. com.
   Tessie Su is an independent economic consultant. Dr Su was
previously an assistant professor at the lnvtituto Tecnologico
Autcnomo de Mtxico. She can be reached at tessiesu@
yahoo. com.

that occurs, it is more profitable to raise the price to that
group of consumers while conceding the sales of the
more price-sensitive customers.
   One circumstance in which it has been argued that an
incumbent's higher price could result from a competi-
tor's entry is in the market of operating systems for per-
sonal computers. In their analysis for the class-action
suits following United States v. Microsoft,1 Davis,
Murphy and Topel argued that entry could trigger higher
prices for the Microsoft Windows®2 operating system.3
They observe that market segmentation is a natural con-
sequence of entry in this industry.4 When a competing
product enters the market, Microsoft, the incumbent
firm, could surrender the low end of the market to the
entrant and raise its price to the remaining relatively less
price-sensitive customers.
   Over the past decade, courts increasingly have relied
on economic analysis for determining lost profits dam-
ages resulting from patent infringement. A damages
analysis based on a but-for model-constructed with a
good understanding of the industry involved and the
appropriate economic theory-is necessary to accurately
reveal how an infringed patentee was damaged. If actual
prices charged by the patentee during infringement were
                                (continued on page 6)

     Keeping Current with the Chair  .................. 3
     From the  Editors  .............................. 4
     Knorr-Bremse- The Federal Circuit
     Overrules Its Precedent ............. ..... 12
     Agreement to Assign Patents Subject to
     Canadian Competition Act .... ................  17
     m Use of the Accused Device in Patent
     Claim Construction ............................ 18
     PP Gimip N ws .............................. 22
     Necent Developments in Intellectual Property Law .. 24


FALL 2004

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