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

Abstract

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.

Heterogeneous Effects of Online Reputation for Local and National Retailers

“…Specifically, we add structure to the standard unobserved product quality term, allowing it to be formed based on a Bayesian learning process where consumers update their belief using the online reputation system. Grennan and Town (2015) and Chernew et al (2008) model learning in a similar manner, but do so in the health-care industry.…”

In-depth review on ‘innovation and regulatory challenges of the drug delivering medical devices’

“…The innovation process should be considered holistically from idea to consumer the value of innovation can be significantly enhanced or diminished by the information regulators require technology firms to produce and disseminate’. 4…”

Tort Reform and Innovation

“…First, FDA applicants are often manufacturers that are not necessarily the innovators. Second, there is evidence of strategic delays in the introduction of medical devices in the U.S. market relative to the European markets (Grennan and Town, 2015). Both of these issues may generate substantial measurement errors for innovative activities and geographic locations and, hence, bias the coefficients toward zero.…”

“…Chatterji and Fabrizio (2014) study the role of users in medical device innovation. Grennan and Town (2015) examine the impact of regulatory testing requirements for medical devices on innovation diffusion. Stern (2015) shows that medical device innovation incentives are shaped by the regulatory approval process.…”