Recalls, Innovation, and Competitor Response: Evidence from The Medical Device Industry

Abstract

Product recalls create significant challenges for R&D intensive firms, but simultaneously generate potentially lucrative opportunities for competitors. Medical device firms operate at the frontiers of innovation: when functioning properly, innovative medical devices can prolong and improve lives; when malfunctioning, the same devices may harm patients and necessitate product recalls. Using comprehensive FDA regulatory data over a 17-year period, we find that competitor firm recalls lead to an increase in new product submissions, establishing a factor that predicts entry into medical device product markets. To explore potential mechanisms underlying this phenomenon, we examine how the number of competitors in a specific product market influences this relationship. Firms increase new product submissions in response to competitor recalls more strongly in markets with fewer competitors—i.e., those settings that represent the greatest market opportunities. While recalls create problems for affected firms, require interventions by regulators, and potential health hazards for consumers, they also appear to stimulate new product submissions by competitors, supporting more product alternatives for patients and providers.