Recalls, Innovation, and Competitor Response: Evidence from Medical Device Firms

George P. Ball; Jeffrey T. Macher; Ariel Dora Stern

Working Paper | HBS Working Paper Series | 2019

Recalls, Innovation, and Competitor Response: Evidence from Medical Device Firms

by George P. Ball, Jeffrey T. Macher and Ariel Dora Stern

Abstract

Innovation and new product development are the lifeblood of firms in R&D-intensive industries, yet malfunctioning products can cause immense damage. Product failures thus create managerial challenges and opportunities for focal firms and their competitors. Focal firm failures often result in sales decreases and cost increases associated with remedial public relations and manufacturing activities. Competitor firm failures, however, can create market opportunities and elicit strategic responses by focal firms. We develop theory and provide empirical evidence of how innovative activity changes in response to product recalls in the U.S. medical device industry. Focal firm recalls slow incremental innovation while competitor firm recalls accelerate incremental and major innovation. Recall prevention and remediation efforts are thus more important than previously suggested, due to significant competitor responses.

Keywords: product recalls; System Shocks; Innovation and Invention; Medical Devices and Supplies Industry;

Language: English

Format: Print

49 pages

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Citation:

Ball, George P., Jeffrey T. Macher, and Ariel Dora Stern. "Recalls, Innovation, and Competitor Response: Evidence from Medical Device Firms." Harvard Business School Working Paper, No. 19-028, September 2018. (Revised January 2019.)

Chapter | Innovation Policy and the Economy, Volume 19 | 2018

The Orphan Drug Act at 35: Observations and an Outlook for the Twenty-First Century

Nicholas Bagley, Benjamin Berger, Amitabh Chandra, Craig Garthwaite and Ariel Dora Stern

On the 35th anniversary of the adoption of the Orphan Drug Act (ODA), we describe the enormous changes in the markets for therapies for rare diseases that have emerged over recent decades. The most prominent example is the fact that the profit-maximizing price of new orphan drugs appears to be greater today than it was in 1983. All else being equal, this should reduce the threshold for research and development (R&D) investment in an economically viable product. Further, the small size of patient populations for orphan drugs, together with the increasing prevalence of biologics among orphan drugs, have created a set of natural monopoly-like markets in which firms face little competition, even after the end of formal periods of patent protection and market exclusivity. Additionally, the evolving technologies of drug development—in particular, the increasingly common use of auxiliary endpoints in clinical trials and the use of biomarkers for patient selection for treatment—now allow manufacturers to target smaller populations. Taken together, these changes raise doubts about whether the ODA encourages the development of products that otherwise would not have been brought to market—or whether, instead, it simply rewards the producers of inframarginal products. After presenting empirical support for our claims of an evolving marketplace, we discuss the tradeoffs associated with reshaping the ODA for the 21st century.

Keywords: Health Care and Treatment; Laws and Statutes; Research and Development; Investment; Markets; Monopoly;

Citation:

Bagley, Nicholas, Benjamin Berger, Amitabh Chandra, Craig Garthwaite, and Ariel Dora Stern. "The Orphan Drug Act at 35: Observations and an Outlook for the Twenty-First Century." Chap. 4 in Innovation Policy and the Economy, Volume 19, edited by Josh Lerner and Scott Stern, 97–137. University of Chicago Press, 2018. View Details

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This study sheds new light on first- and early-mover advantages. Research on this classic topic often assumes that each firm participates in the entirety of the innovation process. However, a division of labor between innovative new entrants and incumbents with complementary assets is common in many industries. In such settings, small new entrants have the additional option to be acquired in a “market for technology.” Using data from the U.S. medical device industry, we find that pioneers “pave the way” for a new product type to reduce the technological and market risks, where the former is of paramount importance. Pioneers ultimately realize a higher likelihood of acquisition but wait longer to be acquired. Therefore, to some extent, later movers can free ride on early-movers’ efforts.

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Recalls, Innovation, and Competitor Response: Evidence from Medical Device Firms

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