Journal of Competition Law & Economics · 2005 · 24 citations · 0 references
LawBusiness EconomicsEconomicsCompetition PolicyMicroeconomicsPatent LitigationActual DamagesDamages In Product LiabilityDemand AnalysisDemand TheoryInjunctions In Patent CasesPatent DamagesConsumer Demand SystemsConsumer Demand TheoryDamages For InfringementDamages In Patent LitigationFlexible Functional FormsLoss Of Profits DamagesLost Profits DamagesPatent Damage Estimation
Econometric methods are useful for studying competition among differentiated products, but misspecifying the consumer demand system can bias results and mislead policy conclusions. The authors aim to guide the selection of demand system specifications by advocating a flexible functional form. They analyze considerations for choosing demand specifications, identify estimation issues, and recommend using a flexible functional form to avoid imposing restrictive elasticity assumptions. Applying the flexible functional form in a patent infringement damages example yields a substantially more reliable lost‑profits calculation than the commonly used restrictive form.
Econometric methods can be helpful when one is trying to understand the nature of competition between products in differentiated products industries, an issue that arises in many competition policy contexts. However, misspecification of the consumer demand system can result in biased econometric results and misleading conclusions. We discuss some considerations that go into choosing a demand system specification and suggest that a ‘flexible functional form’ be used. This approach avoids placing restrictions on the demand elasticities. We identify and discuss other issues that arise in the estimation of demand systems. We conclude with an empirical example concerning the calculation of lost profits damages in a patent infringement case. This example demonstrates how using a flexible functional form leads to a substantially more reliable damages calculation than using the particular restrictive functional form that is commonly used to calculate lost profits damages in patent litigation.