When estimating patent damages, the fundamental task is to construct a “but-for” modelthat simulates, as closely as possible, the marketplace absent infringement. 1 Calculation ofdamages is premised upon four principles. These are: 1) A patent's economic and commercialvalue derives largely from the market power it confers to the patent owner; therefore, inestimating damages from patent infringement, the market power conferred by the patent must betaken into account; 2) When the price of a good increases, consumption of the good declines, andvice versa (law of demand); 3) Only costs caused by extra sales should be charged against extrasales revenues; therefore, incremental costing is the proper approach. Both the technology andthe size of the output increment determine which costs are relevant; 4) Royalties are determinedin hypothetical negotiations in which both the market power flowing from the patent and therelative bargaining power of the negotiators influence the outcome. In response, this essay'ssystem dynamics model simulates the BuSpar? market as close as possible, absent infringement.The modeling process illustrated in this essay accounts for:The market power that the BuSpar? patent confers to Bristol-Myers Squibb Co. (BMS).The demand and price relation in the BuSpar? market.The cost of regaining lost sales by using incremental costing.The difference between royalty and lost profit damages.
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