Robert A. Miller, Tepper School of Business, Carnegie Mellon University
Robert A. Miller, Tepper School of Business, Carnegie Mellon University
Innovation and diffusion of medical treatment
Innovation and diffusion of medical treatment
We develop and estimate a dynamic structural model of demand for a product line whose spectrum of characteristics evolves over time because innovation is endogenous to consumer demand. To achieve this goal, we provide a new approach to the econometric challenge of estimating the process of technological change where innovation under uncertainty includes both frequent and incremental modifications along with sporadic major breakthroughs. Quality in our model is a multidimensional object: new products that are superior in some dimensions might be inferior along others. For example, new medicines more effective in combating disease than existing products sometimes have harsher side effects. In our model consumer choices determine both the speed and the direction of product innovation. Demand externalities arise because market shares drive innovation. We apply our framework to analyze consumer choice and the realized path of innovations over a long time horizon in a maturing product market: HIV drugs. In this market, we observe the introduction of hundreds of new products, marking mostly modest, but sometimes major innovations over existing technologies. Our estimates are obtained through simulations of alternative hypothetical worlds that might have arisen if the innovations had taken different paths to the ones we observe. They have standard asymptotic properties, and we use them to assess counterfactual policies that affect innovation and consumer welfare by modifying consumer choices.