Legal Definitions - price-erosion theory

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.