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Simple English definitions for legal terms
price-erosion theory
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A quick definition of price-erosion theory:
Price-erosion theory: A way to measure how much money a company loses when someone else copies their invention. It looks at how much the company could have sold their invention for if it was protected by a patent, and compares it to how much they actually sold it for when they had to compete with the copycat.
A more thorough explanation:
Price-erosion theory is a concept used in patent law to determine the amount of lost profits due to patent infringement. It calculates the difference between the price an item could have sold for with patent protection and the price it actually sold for while competing against an infringing item.
For example, let's say a company holds a patent for a new type of phone case that they sell for $50. However, another company starts selling a similar phone case for only $20, which causes the original company's sales to decrease. Using price-erosion theory, the original company can calculate the amount of lost profits by subtracting the $20 price of the infringing item from their own $50 price.
Another example could be a pharmaceutical company that holds a patent for a new drug. If a generic version of the drug is released before the patent expires, the pharmaceutical company can use price-erosion theory to calculate the amount of lost profits due to the lower price of the generic version.