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Product safety spillovers and market viability for biologic drugs

Author

Listed:
  • John Romley

    (University of Southern California)

  • Tiffany Shih

    (Precision Health Economics)

Abstract

When a pharmaceutical manufacturer experiences a safety problem, negative impacts on profitability can spread to its competitors. Reduced consumer confidence, product recalls, and litigation are limited to the responsible manufacturer only if that manufacturer can be clearly linked to the safety problem. We analyze the impact of “accountability” for safety problems on manufacturer entry decisions and investments to mitigate risk. Consistent with prior research, we find investment levels increase with accountability in a duopoly market, and that accountability can thus enhance market viability and improve consumer welfare. However, we also analyze the impact of accountability on entry of a competitor, after the originator’s exclusivity has expired. Accountability promotes the development of a robust market by raising expected profits, particularly for an entrant with a relatively low likelihood of a safety problem. Yet entry need not improve consumer welfare, and may benefit the incumbent in our model. In contrast to the traditional entry deterrence mechanism, when accountability is sufficiently low, increased incumbent investment encourages entry. Our analysis has important implications for biologic drugs, insofar as pathways for entry by “biosimilars” have been established in Europe and the United States, and informs pharmacovigilance and other accountability policies for biologics.

Suggested Citation

  • John Romley & Tiffany Shih, 2017. "Product safety spillovers and market viability for biologic drugs," International Journal of Health Economics and Management, Springer, vol. 17(2), pages 135-158, June.
  • Handle: RePEc:kap:ijhcfe:v:17:y:2017:i:2:d:10.1007_s10754-016-9208-2
    DOI: 10.1007/s10754-016-9208-2
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    References listed on IDEAS

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    Cited by:

    1. Sumedha Gupta & Thuy D. Nguyen & Patricia R. Freeman & Kosali I. Simon, 2020. "Competitive Effects of Federal and State Opioid Restrictions: Evidence from the Controlled Substance Laws," NBER Working Papers 27520, National Bureau of Economic Research, Inc.
    2. Xue, Yang-chen & Geng, Xian-hui & Kiprop, Emmanuel & Hong, Miao, 2020. "How Does the Spillover Effect Affect Companies Food Safety Risk Management? New Orientation of Food Safety Management," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304310, Agricultural and Applied Economics Association.
    3. Xue, Yangchen & Geng, Xianhui & Kiprop, Emmanuel & Hong, Miao, 2021. "How do Spillover Effects Affect Food Safety Management of Companies? Searching New Orientation of Regulations for Food Safety," 2021 ASAE 10th International Conference (Virtual), January 11-13, Beijing, China 329426, Asian Society of Agricultural Economists (ASAE).

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    More about this item

    Keywords

    Pharmaceutical quality; Pharmaceutical competition; Pharmaceutical regulation; Biologic drugs;
    All these keywords.

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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