2025 Theses Doctoral

Essays in Product Creation and Substitution

Ghai, Surabhi

This dissertation contains three essays studying product creation and substitution. The first two chapters focus on the firm and how market regulations affect firms' decisions to create new products. The last chapter focuses on consumers and their demand substitution across products. Products exist in more narrow product spaces, based on shared characteristics, which firms and consumers take into account in their supply and demand decisions.

Chapter 1 examines the effect of price regulations on new product creation in pharmaceuticals. Rising pharmaceutical prices across the world is an important policy concern, particularly in developing countries, where access to essential medicines and healthcare is already limited. As a result, many countries have implemented or proposed price control policies. However, price controls may introduce market distortions, such as shortages, misallocation, and reduced incentives for firms to innovate. In the case of partial price controls, firms may also introduce new unregulated products, thereby increasing price dispersion. In this chapter, I study the impact of a partial price control policy in India's pharmaceutical sector on new product creation by existing firms. Using comprehensive pharmaceutical wholesale sales data and an event study framework, I study whether firms with greater exposure to the policy--based on their initial sales and prices--launch new products in response to the policy announcement. I find that firms with greater policy exposure do not create new products or enter new markets post-policy. Particularly, they also do not create new products of unregulated formulations even within the regulated active ingredient markets. These findings suggest that the policy may have successfully reduced prices for consumers without distorting firms' incentives to create new products to cannibalize the sales of their existing regulated products.

Chapter 2, coauthored with Gianluca Antonecchia, Ajay Bhaskarabhatla, and Eric Verhoogen, studies the path of product evolution within pharmaceutical firms in India, with a focus on newly available markets due to patent expirations. When firms adopt new products and expand their product scope, they may invest in new technologies, increase product quality, and improve worker training. This process is known as firm upgrading and is particularly important for firm growth in developing countries. However, strong patent protections encourage innovation and R&D in developed countries while hindering firm upgrading in developing countries by restricting firm entry into new markets and technologies. We study how firms in India's pharmaceutical sector expand into new markets and technologies when drug markets become newly available after a patent expiration in the United States. We propose new measures of proximity between firms and drugs they have not yet adopted and distinguish between proximity in production technology (supply-side) and proximity in therapeutic use (demand-side). We show that in general firms are more likely to adopt drugs that are similar to those they already produce, especially if they are similar to their core product. Once a market newly opens due to a patent expiration, we observe firm entry into the newly available market, particularly by technologically distant firms. Our results suggest that patents hinder access to medicines and slow firm upgrading in developing countries by delaying firm entry into new and differentiated markets.

Chapter 3, coauthored with Colin Hottman, estimates the degree of demand substitution between goods produced in different countries. This parameter, known as the Armington elasticity, is an important measure in international trade and macroeconomics, as it determines the magnitude of the relative demand response to international relative prices. For example, the efficacy of trade policy tools--such as tariffs--in shifting demand toward domestically produced goods will depend on the substitutability of U.S. goods and imports. We are the first to combine U.S. retail scanner data with barcode-level country of origin information for a broad set of product categories. We use this novel data to estimate the degree of substitution between domestically produced goods and imports in U.S. retail. In doing so, we develop a novel generalization of Feenstra (1994) for nested demand systems, and apply this approach to a novel, non-homothetic generalization of nested CES preferences with rich substitution patterns. Unlike prior work, our results provide clear evidence that the macro elasticity of substitution (between U.S. and foreign goods) is significantly smaller than the micro elasticity of substitution (within domestic or foreign varieties) for nearly all product categories. We apply our model to three origins--domestic goods, imports from low-income countries, and imports from high-income countries--and find that within-origin substitution is still substantially larger than across-origin substitution. These results have important implications for trade policy, as they suggest that tariffs on Canada would lead to greater substitution toward imports from other high-income countries (such as Germany or France) than toward U.S. products, and tariffs on Mexico would lead to greater substitution toward imports from other low-income countries (such as China) than toward U.S. products.