Regulatory Approval and Expanded Market Size

36 Pages Posted: 7 Jun 2021 Last revised: 9 Jun 2023

See all articles by Benjamin Berger

Benjamin Berger

Harvard University

Amitabh Chandra

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Craig Garthwaite

Northwestern University; National Bureau of Economic Research (NBER)

Date Written: June 2021

Abstract

Regulatory review of new medicines is often viewed as a hindrance to innovation by increasing the hurdle to bring products to market. However, a more complete accounting of regulation must also account for its potential market expanding effects through quality certification. We combine data on FDA approvals for follow-on indications and patient-level data on utilization, and examine whether FDA approval of a follow-on indication increases the use of a drug for that indication. We find 5 facts for the market-expanding role of regulation: (1) follow-on approvals increase the share of patients taking a drug with that indication by 4.1 percentage points, or 40% increase over baseline use, at the time of approval; (2) there is little market learning prior to or following the approval of the follow-on indication, suggesting that such approvals fully certify the new use; (3) the effect of these approvals is larger for uses in a different disease area than previous indications, an increase equivalent to over 4 1⁄2 years of market-learning; (4) it is FDA approval, not the initiation of clinical trials that generate the expansion in market size; (5) the market expansion is consistent with physicians prescribing the medicines more because of higher perceived benefits, not reduced administrative costs.

Suggested Citation

Berger, Benjamin and Chandra, Amitabh and Garthwaite, Craig, Regulatory Approval and Expanded Market Size (June 2021). NBER Working Paper No. w28889, Available at SSRN: https://ssrn.com/abstract=3861418

Benjamin Berger (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Amitabh Chandra

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Germany

Craig Garthwaite

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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