I would like to learn about the potential legal costs involved for a
domain owner who runs into a domain/trademark dispute. My questions
are not so much about whether the purchase or use of a domain
constitutes a  trademark infringement, but rather how much it would
cost the domain owner to defend his case and what the financial
consequences are if he loses the battle. Suppose that the following
happens:

Mr. Tiyuwoik [this is a fictitious name] purchases the domain name
'tiyuwoik.com' for his homepage, believing that he is not infringing
upon any trademark. Then after some time he receives a 'cease and
desist' letter from a lawyer representing a company called 'Tiwoic',
demanding that Mr. Tiyuwoik transfer the domain to them. Mr. Tiyuwoik
decides to keep the domain and Tiwoic put their claim in front of an
arbiter (e.g. WIPO).

Please consider the following possible reactions to the initial claim:
1. Mr. Tiyuwoik denies or ignores the claim from Tiwoic and refuses to
respond to any further letters, even to those of the arbiter to which
the complainant then turns.
2. Mr. Tiyuwoik defends his case in front of the arbiter, without the
help of a lawyer (if this is at all possible).
3. Mr. Tiyuwoik hires a lawyer to defend  his case in front of the arbiter.

I am interested in any estimate/info of the costs of legal assistance
for Mr. Tiyuwoik and the possible legal costs, both in the case that
Mr. Tiyuwoik wins the dispute and in the case that he loses it.

Here is an interesting case you may be interested in:

http://www.ncchelp.org/The_Story/the_story.htm

These are general comments since there was not sufficient information
provided and may not apply to your specific case
In case 1. The arbiter will make a decision based on the information
available (I think you can submit information and not show up) and the
registrar will implement whatever decision is made unless Mr. Tiyuwoik
files a lawsuit. No costs.
In case 2. Costs of traveling and associated expenses.
In case 3. Costs of lawyer plus case 2 expenses