Working Paper: NBER ID: w20981
Authors: Matthew Grennan; Robert Town
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 EU could benefit from more testing. “Post-market surveillance” could further increase surplus.
Keywords: Medical Devices; Regulation; Consumer Welfare; Market Outcomes
JEL Codes: I11; L11; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US testing requirements (L90) | reduction in consumer uncertainty about product efficacy (D18) |
| reduction in consumer uncertainty about product efficacy (D18) | enhancement of consumer welfare (D18) |
| FDA-approved products (L65) | better clinical efficacy outcomes (I11) |
| regulatory testing requirements (US vs. EU) (L51) | varying levels of consumer information (D83) |
| varying levels of consumer information (D83) | consumer choice and market dynamics (D16) |
| US regulatory policy (G18) | maximizes total surplus (D61) |
| lack of stringent premarket testing in EU (D18) | greater performance uncertainty (D89) |
| greater performance uncertainty (D89) | negative impact on consumer welfare (F61) |
| US testing applied to EU markets (G15) | significant increase in consumer surplus (D11) |
| increased postmarket surveillance (D18) | improved consumer welfare (D18) |
| increased testing (C90) | reduced uncertainty and improved product quality (L15) |