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Abstract

The possibility that small populations would see few medications developed for their conditions has [...] led the U.S. Congress to pass the 1983 Orphan Drug Act ("ODA"), giving firms special incentives to develop drugs for diseases afflicting fewer than 200,000 persons per year.[...][U]under the Act, drug makers receive seven years of exclusive marketing upon FDA approval of newly-developed drugs qualifying as "orphan drugs"--i.e., drugs for disorders affecting fewer than 200,000 persons.[...]Together, [the] provisions (a) increase the effective market size; and (b) reduce fixed (sunk) costs. In doing so, the Act provides a natural experiment for measuring the impact of increased market size, relative to fixed costs, on product development, consumption, and welfare.[...] In light of the apparent effect of the ODA on drug development, we examine its effect on two measures related to welfare: consumption and mortality. First, we ask whether there is evidence, in the pharmaceutical context, that misery loves company. We compare across conditions with different levels of prevalence ("market size"), asking whether physicians are more likely to prescribe drugs for common diseases, and whether people with common diseases are likely to live longer. Results from this approach are highly suggestive: more prevalent conditions have substantially more products available, and we document both that larger affected populations are much more likely to take a drug than smaller affected patient populations, and that mortality rates are lower for persons with more common conditions. A shortcoming of this approach, however, is the possibility of unobserved heterogeneities leading both to large markets and many drugs. Putting this differently, the cross-sectional measurement strategy may not reflect a clean source of exogenous variation in market size. Conveniently, the passage of the Orphan Drug Act provides a source of exogenous variation in market size, relative to fixed costs, for drugs targeting small populations. This motivates our second measurement approach for documenting the effect of market size on drug consumption and, by extension, welfare. We document growth in consumption and increases in longevity for individuals with less common conditions, relative to those with more common conditions. Moreover, we document that these effects on consumption and longevity are significantly related to orphan drug use for the condition. This Article proceeds in four parts. Part I provides background by outlining the mechanism underlying preference externalities. We also review relevant literature in this Part. Part II describes the data used in this study. Part III presents our empirical strategy and results. We find clear cross-sectional evidence that misery loves company, both before and after the passage of the Orphan Drug Act. But the Act appears to have weakened the link between market size and welfare: conditions with substantial orphan drug use have larger increases in consumption and longevity than others. In the conclusion, we consider our results in both narrow and broad contexts.

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