Valuation of Patented Product Features

Abstract

Ultimately, patents have value to the extent to which the product features enabled by the patents have economic value in the marketplace. That is, products which are enhanced by inclusion of patented features should generate incremental profits to the firm offering the enhanced product. Measures of incremental profits should be at the heart of damage estimates in patent litigation. Incremental profits can only be assessed by considering demand for products with patented features and contrasting that demand to demand for the same product without the patent feature. Profit calculations must be based on valid estimates of demand as well as assumptions about how competitive forces affect demand. This requires a set of equilibrium calculations in which profits are measured by considering the competitive response to introduction of the product with the enhanced feature. A special variety of survey analysis called conjoint analysis can be used to estimate demand. Recently, conjoint methods have been applied in the patent setting but the measures of value used are not based on equilibrium profits. The Willingness To Pay and Willingness To Buy methods used by conjoint practitioners do not measure the economic value of a patented product feature. We illustrate our method using the market for digital cameras and show that current methods can overstate the value of the patent.

Keywords: patent valuation, patent damages, competitive equilibrium, conjoint surveys, Bayesian methods

JEL Classification: L1, L3, M3, K2