Does Misery Love Company? Evidence from pharmaceutical markets before and after the Orphan Drug Act

With substantial fixed costs of drug development, more common conditions can support more products. If additional pharmaceutical products are beneficial, they will attract greater consumption and promote better health, e.g. greater longevity. We ask how market size measured by condition prevalence affects consumption and longevity. We document in condition cross sections that both the tendency to use a drug and longevity are higher for individuals with more prevalent conditions. We also make use of the 1983 Orphan Drug Act (ODA), which promoted development of drugs for the treatment of rare conditions. Longevity and drug use have grown more quickly for persons with rare diseases and even more quickly for persons with conditions with substantial orphan drug use.

Does Misery Love Company? Evidence from Pharmaceutical Markets Before and After the Orphan Drug Act

When production entails fixed or sunk costs, the number of products developed can increase with the size of the market. A larger potential market provides greater reward for firms that can bring a new product to market. Additional products increase welfare because if products are differentiated, then additional products confer benefits by giving more consumers options that better suit their needs. In this way, consumers benefit each other via a mechanism one might term “preference externalities.” Of course, whether or not products are differentiated, additional products can place downward pressure on prices