Experimentation levels and social welfare under FDA’s flexible approval standards
研究了FDA采用灵活审批标准时，制药公司的实验水平和社会福利如何变化，发现灵活政策对一种疾病市场有利而对另一种有害。
The FDA sets a uniform hypothesis test’s approval standard for new drugs at the end of Phase III clinical trials. We study the impact of flexible approval standards on experimentation and social welfare when pharmaceutical companies (firms) are strategic, especially regarding the experimentation levels for the new drug. The FDA sets the approval standards to maximize social welfare consisting of the benefits/cost of approving an effective/ineffective drug, while each firm seeks to maximize its payoff, considering the experimentation cost and potential benefit of entering the market upon approval, modeled by an optimal stopping of a diffusion process. We consider a Stackelberg game with the FDA and two firms in two distinct markets. We show the existence of unique equilibrium and provide comparative statics. Moreover, we apply our results to a case study with real data and provide insight into a problem with one rare and one common disease. Our results show that the shift from a uniform to a flexible approval policy will be beneficial to one market and detrimental to the other. We characterize the conditions under which such a shift is advantageous or disadvantageous for the FDA and firms experimenting in rare disease markets.