Coase-Sandor Working Paper Series in Law and Economics
Piece Problems: Component Valuation in Marketing and in Patent and Tort Law
The problems referred to in the title of this chapter concern evaluating a given variable when it is one of several that have combined to bring about a result. In some cases, there is an easy market solution. Imagine that you contract to buy a house and then the beautiful kitchen stove, one of many things that attracted you to the property, is destroyed before you close the transaction or occupy the property. How much should the price now be reduced? Here there is an upper limit based on the cost of a comparable replacement appliance. A more precise valuation would also be easy if identical houses, lacking this one feature, had recently been sold. The stove is just a piece of the larger transaction, and with these convenient facts, there is not much of a “component valuation problem.” Additionally, the stove is unlikely to have been of greater value because of its interaction with other items in the house; colors and sizes are fairly standardized. “Conjoint analysis” – a term that usually refers to survey evidence that tries to elicit the value of a component – is therefore unnecessary, or at least uncomplicated, because value does not depend on an interaction among variables in a way that is not directly observed. It is also interesting because it does not present a difficult Game Theory problem, or result that might be described in common parlance as something that depends on the relative bargaining skill of the parties
In contrast, consider an important patent case, discussed shortly, concerning a company that adds three components, ABC, to a product in order to fetch a higher price and capture a larger market share. It turns out that the use of A knowingly infringed on the patent of another. What are the damages owed to this patent holder? It would be convenient if the two parties had recently bargained for the right to use A and nearly come to an agreement – though this would introduce relative bargaining power rather than some clean measure of value; it would also be nice if A were the only new feature in the product sold, instead of being combined with B and C. In these cases, we would know the value of A to the breaching party or to the market. I aim to show that this component valuation problem in patent law is often like the “conjoint analysis” question in marketing research, a topic also discussed presently. I then show that it is also comparable to tort law’s difficulty in carrying out the doctrine of comparative negligence, after a factfinder determines that multiple parties’ negligence caused an injury. I like to think that drawing attention to the resemblance if not the equivalence of these matters is part of a connective tissue between the literature and practice of marketing and of law. Finally, I suggest that some solutions to the problem in one area might be useful, or hint at untried solutions, in another. As we will see, it is probably impossible to find a single, perfect solution that fits all cases in these areas (or even all that arise in any one of these fields), but it is interesting to think that areas of law might be informed by the marketing literature, and vice versa.