Posted in Finance, Accounting and Economics Terms, Total Reads: 2527
Definition: Price Erosion
Price Erosion is defined as the difference between actual price and potential price of goods and services. The potential price is the price of the item that would have been realized in case of no competition from the competitors.
This is the phenomenon that is most commonly observed in technology companies where the professional struggle to maintain a consistent pricing over the long duration. The lack of strategy often leads to change in pricing due to improper guidelines to field sales. The pricing then depends on the customer demands and competition.
In order to recover damages from price erosion, the company who owns the patent must show the “but for” infringement and able to recover a higher price. In order to obtain benefits from this, the company must show the likely outcomes and profits had been the infringement and thus, price erosion would not have happened.
In general, price erosion is a negative price realization in the market. It can be measured on similar products or services in two comparable time periods where there is a continuous decline in price. Price erosion happens with products or services that are similar. Customers are only willing to pay a premium if their perceived value of the product or service is higher, which occurs when companies haven’t clearly differentiated their products.