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

Abstract

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

Firm Scope and Spillovers From New Product Innovation: Evidence From Medical Devices

“…It also provides extensions of our results, adding price as an independent control variable, where we find our results unchanged. This is consistent with anecdotal evidence that physician decisions about what product to use are not very responsive to price, which has been confirmed in previous studies of coronary stent demand(Grennan 2013(Grennan , 2014Grennan and Town 2018) and demand for other medical devices (Grennan and Swanson 2018a) that find very small effects of price on quantities.…”

“…The gap between the two regulatory systems is the focus of a number of consulting and government reports and an academic study by Grennan and Town (2018) using the same stent data we use here (and to which we refer the reader for greater detail and data on these processes). For the purposes of this study, the most important differences between the two markets are: (1) the lower monetary and time costs of obtaining EU approval which results in more and earlier market entry in the EU than US (particularly for stents, where the gap in processes is largest); and (2) the lower information requirements for EU entry which leads to more gradual market adoption of new products as US trial evidence accrues.…”

“…Finally, to further eliminate the possibility of time-varying unobservables that impact the within-hospital shares of all of a manufacturer's products simultaneously, we focus on the discrete changes to stent shares that result from innovative DES product entry. The regulatory requirements for introducing a new coronary stent are expensive and time-consuming in the US, with the precise timing and outcomes of completing clinical trials and obtaining regulatory approval being uncertain (Stern 2017;Grennan and Town 2018). This uncertainty allows us to consider the stent share changes that result from new product introductions as plausibly exogenous with respect to balloon and guidewire market trends, especially within the narrow time windows we study in our tightest specification.…”

“…While angioplasty is performed in the same way in the EU as in the US, and provides the same benefits to patients, the regulatory barriers to entry are much lower in the EU in terms of clinical trials required. This leads to more firm entry in the EU, but also less information about product quality available upon entry, than in the US (Grennan and Town 2018). Consequently, this means that the EU market is less concentrated and has more firms with varying levels of multi-category presence, but at the same time, new stent introductions have a less pronounced impact on market shares, requiring more assumptions to validate our research design.…”

“…These results also relate broadly to recent antitrust debates in the technology and telecom sectors where there has been much concern about market power in one product category affecting competition and innovation in related product categories. More specifically, they add to the growing body of research on the factors influencing innovation incentives in medical technology in particular (Chatterji and Fabrizio 2012;Nistor and Tucker 2015;Chatterji and Fabrizio 2016;Galasso and Luo 2017;Stern 2017;Grennan and Town 2018;Galasso and Luo 2018).…”