A Markov‐perfect equilibrium model of the impacts of price controls on the performance of the pharmaceutical industry

Filson, Darren

doi:10.1111/j.1756-2171.2012.00159.x

Cited by 30 publications

(19 citation statements)

References 52 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…We also measure how this information affects market structure and welfare through entry and consumption decisions. We believe this focus on market structure in our paper is complementary to recent empirical research on other regulatory tools that affect product entry incentives, such as patent breadth and length (Budish, Roin, and Williams 2015) and price regulations (Kyle 2007;Filson 2012). Whereas the focus of that literature has been on innovative activity with stylized monopoly market structures, we show that the welfare impact of regulation on market structure and buyer decisions can be large as well.…”

Section: Introductionmentioning

confidence: 54%

“…As discussed in the Introduction, there is an important literature measuring the optimal regulatory policies across settings as diverse as pharmaceuticals (Filson 2012;Budish, Roin, and Williams 2015), liquor distribution (Seim and Waldfogel 2013;Miravete, Seim, and Thurk 2014), and water management (Timmins 2002). In general, the estimates show that the regulator's behavior departs from the socially optimal policy by anywhere from 10 to 50 percent.…”

Section: Discussionmentioning

confidence: 99%

See 1 more Smart Citation

Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices

Grennan

Town

2015

View full text Add to dashboard Cite

We propose a model where new product quality is uncertain, but market participants learn over time. Regulation balances information's role in reducing consumer risk versus reducing access to innovation. Using new data and variation between EU and US medical device regulations, we document patterns consistent with the model and estimate its parameters. We find: (1) without information from testing, risk would severely inhibit usage; (2) US policy maximizes total surplus in our estimated model while the EU could gain 20 percent with more pre-market testing; and (3) more "post-market surveillance" could increase surplus 24 percent. Disciplines Commercial Law | Medicine and Health Sciences CommentsThis is a working paper, not accepted for publication or review. ABSTRACTWe propose a model where new product quality is uncertain, but market participants learn over time. Regulation balances information's role in reducing consumer risk versus reducing access to innovation. Using new data and variation between EU and US medical device regulations, we document patterns consistent with the model and estimate its parameters. We find: (1) without information from testing, risk would severely inhibit usage; (2) US policy maximizes total surplus in our estimated model while the EU could gain 20 percent with more pre-market testing; and (3) more "post-market surveillance" could increase surplus 24 percent.

show abstract

Section: Introductionmentioning

confidence: 54%

Section: Discussionmentioning

confidence: 99%

Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices

Grennan

Town

2015

View full text Add to dashboard Cite

show abstract

“…12 An extreme case, where post-approval learning is as informative as pre-market trials, at zero incremental cost, would yield an estimated welfare increase of 15-18 percent. 13 Our focus on information and market structure is complementary to recent empirical research on other regulatory tools that affect late-stage product development and entry incentives, such as patent breadth and length (Budish et al 2015), price regulations (Kyle 2007;Filson 2012), and regulatory uncertainty and innovation incentives (Stern 2017). Whereas the focus of that literature is on the extent and timing with which products undergo late stage R&D/testing and eventually enter the market, we show that, in addition to these innovation and entry implications, the welfare impact of the product performance information generated can also be large.…”

Section: Us At Allmentioning

confidence: 99%

Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices

Grennan

Town

2020

American Economic Review

View full text Add to dashboard Cite

We study the impact of regulating product entry and quality information requirements on an oligopoly equilibrium and consumer welfare. Product testing can reduce consumer uncertainty, but also increase entry costs and delay entry. Using variation between EU and US medical device regulations, we document patterns consistent with valuable learning from more stringent US requirements. To derive welfare implications, we pair the data with a model of supply, demand, and testing regulation. US policy is indistinguishable from the policy that maximizes total surplus in our estimated model, while the European Union could benefit from more testing. " Post-market surveillance" could further increase surplus. (JEL D43, I18, L13, L51, L64, O31, O38)Most innovative new products are brought to the market because their makers believe they create new value. However, with innovation often comes uncertainty, and once in the hands of consumers, there is some chance that the product will not operate as hoped. The consequences of this failure range from consumer regret to death. When this uncertainty matters for welfare, products often must go through pre-market testing and become approved and certified by a formal body before entering the marketplace. Especially in oligopolistic markets, where private and public incentives may diverge (Spence 1975), the standard that a regulatory body imposes has the potential to fundamentally alter market outcomes by requiring testing that firms would not undertake themselves. As first highlighted by Peltzman (1973) in the context of pharmaceuticals, higher testing standards can create value through generating information that decreases uncertainty, but this benefit comes with the potential cost of fewer available products due to delayed entry and higher entry costs from more testing. Today such certification processes are commonplace

show abstract

“…Theoretical work on this topic has been introduced for instance by Filson and Masia [ 30 ] who present a computational model in which even small reductions in profitability have substantial impacts on firm success and innovation. By means of a Markov model Filson [ 31 ] simulates what happened if the U.S. adopted price controls like those in the rest of the world. According to his calculation, this measure would reduce the number of new drugs by approximately 75%.…”

Section: Introductionmentioning

confidence: 99%

Pharmaceutical regulation in Europe and its impact on corporate R&D

Eger

Mahlich

2014

Health Econ Rev

View full text Add to dashboard Cite

ObjectivesMany European countries regulate the markets for prescription drugs in order to cope with rising health expenditures. On the other hand, regulation distorts incentives to invest in pharmaceutical R&D. This study aims at empirically assessing the impact of regulation on pharmaceutical R&D expenditures.MethodsWe analyze a sample of 20 leading pharmaceutical companies between 2000 and 2008. The share of sales in Europe serves as a proxy for the degree of pharmaceutical regulation. We control for other firm specific determinants of R&D such as cash flow, company size, leverage ratio, growth rate, and Tobin’s q.ResultsOur results suggest a nonlinear relationship between European sales ratio and R&D intensity. Beyond a threshold of 33% of sales generated in Europe, a higher presence in Europe is associated with lower R&D investments.ConclusionThe results can be interpreted as further evidence of the deteriorating effect of regulation on firm’s incentives to invest in R&D.

show abstract

A Markov‐perfect equilibrium model of the impacts of price controls on the performance of the pharmaceutical industry

Cited by 30 publications

References 52 publications

Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices

Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices

Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices

Pharmaceutical regulation in Europe and its impact on corporate R&D

Contact Info

Product

Resources

About