For copies of papers please follow links below, see my Google Scholar page, or E-mail .

My research is concerned with business strategy regarding innovation and entry into new markets, how followers differentiate from leaders, and how these strategies depend on government policy. Most of my work has applications in health care, especially pharmaceuticals and biologics. To encourage more innovation for products treating neglected diseases, Henry Grabowski, Jeffrey Moe, and I proposed a priority review voucher prize. Our proposal became law in 2007.

Research areas

Business Location	Pharmaceutical Innovation	Health Care Costs
Differential Prices	Pharmaceutical Followers

Business Location
When firms cluster, they engage in more intense price competition. So why cluster? My research explores some hypotheses. Followers cluster near leaders to i) free ride on the demand information of the market leader, ii) because they can differentiate their products and mitigate price competition, and iii) because zoning forces clustering.

1. David B. Ridley. "Herding versus Hotelling: Market Entry with Costly Information." Journal of Economics and Management Strategy. 2008. Vol. 17, No. 3: 607-631. (preprint)
   Why do businesses such as fast-food restaurants, coffee shops, and hotels cluster? In the classic analysis of Hotelling, firms cluster to attract consumers who have travel costs. We present an alternative model where firms cluster because one firm is free riding on another firm's information about market demand. One consequence of this free riding is that an informed firm might forego a market that it knows to be profitable. Furthermore, an uninformed firm might earn higher profits when research costs are high, because it can credibly commit to ignorance.
2. Gabriel A. Picone, David B. Ridley, and Paul A. Zandbergen. "Distance Decreases with Differentiation: Strategic Agglomeration by Retailers." International Journal of Industrial Organization. 2009. Vol. 27, No. 3: 463-473. (preprint)
   Theory predicts that intense price competition results when firms cluster with rivals. Yet, strong evidence of clustering is found in previous empirical research. Researchers typically measure clustering by comparing observed location patterns to random assignment. The random assignment benchmark does not, however, account for zoning and geography and therefore might overstate the extent of strategic agglomeration. As evidence, we find that public elementary schools cluster more than random, not because of agglomeration economies, but due to demand density and limited location options. We argue that a better measurement of strategic agglomeration is to compare across product markets with similar zoning and other location restrictions but different benefits from agglomeration. We use L-function analysis of five product markets in five cities. We find that retailers with greater ability to differentiate their products are more likely to strategically cluster.
3. David B. Ridley, Frank A. Sloan, and Yan Song. "Retail Zoning and Competition." (Working paper)
   Zoning is one of government's most powerful tools for influencing local competition. Economists have assumed that zoning decreases competition, but we demonstrate that it can have the opposite effect. Zoning can increase competition by forcing sellers closer together which can decrease prices and drive out sellers. Thus, zoning can reduce prices and external costs, but decrease variety and increase travel costs for consumers traveling from outside the zoned area. Surprising predictions follow: price rises with the number of sellers, and mean distance increases with the number of sellers, both due to zoning. In one of the first econometric analyses to measure retail zoning, we find evidence that mean distance rises with the number of sellers, the number of sellers rises with less restrictive zoning, and distance between sellers falls with greater product differentiation.

Pharmaceutical Innovation
How can policy makers encourage innovation?

1. David B. Ridley, Henry G. Grabowski, and Jeffrey L. Moe. "Developing Drugs for Developing Countries." Health Affairs. 2006. Vol. 25, No. 2: 313-24. Appendix
   • We proposed a prize called a Priority Review Voucher to be awarded to the developer of a treatment for a neglected disease. In 2007 Senators Brownback (R-KS) and Brown (D-OH) sponsored an amendment to the Food and Drug Administration Amendments Act of 2007. President Bush signed the bill in September 2007.
   • Senator Brownback wrote, “After reading their proposal in Health Affairs, I met with Ridley and colleagues to discuss the idea further, and I subsequently drafted an amendment…Indeed, their idea is the heart of my Elimination of Neglected Diseases (END) amendment.” The Senator's complete comments are available at Health Affairs.
   • Bill Gates described our idea in his speech at the World Economic Forum in Davos in 2008: “But some of the highest-leverage work that government can do is to set policy and disburse funds in ways that create market incentives for business activity that improves the lives of the poor. Under a law signed by President Bush last year, any drug company that develops a new treatment for a neglected disease like malaria or TB can get priority review from the Food and Drug Administration for another product they've made. If you develop a new drug for malaria, your profitable cholesterol-lowering drug could go on the market a year earlier. This priority review could be worth hundreds of millions of dollars.” The speech is at the Gates Foundation web site.
2. Jeffrey L. Moe, Henry G. Grabowski, David B. Ridley, and Aaron S. Kesselheim. "FDA Review Vouchers." New England Journal of Medicine. 2009. Vol., 360, No. 8: 837-838.
3. Henry G. Grabowski, David B. Ridley, and Jeffrey L. Moe. "Priority Review Vouchers to Encourage Innovation for Neglected Diseases.” In: K. Eggleston, ed. Prescribing Cultures and Pharmaceutical Policy in the Asia-Pacific. Brookings Institution Press. 2009.
4. James J. Anton and David B. Ridley. "Rewards for Followers in R&D Races and Implications for the Pharmaceutical Industry." (Working paper)
   Followers can provide variety and competition, but might duplicate fixed costs and reduce the rewards for innovators. Regulations that ban or require higher quality from followers affect competition downstream (differential quality softens price competition) and affect incentives for research and development upstream (decreasing rewards for followers increases the odds of getting an innovator).

Pharmaceutical Followers
How do followers compete with leaders and how should policy makers treat followers?

1. Anton and Ridley. (see above)
2. David B. Ridley. "Payments, Promotion, and the Purple Pill." (Working paper)
   Followers often engage in intense price competition, but pharmaceutical price competition is often hidden because rebates are confidential. We find that demand is very sensitive to relative patient copayments, so pharmaceutical manufacturers have a strong incentive to pay greater rebates to obtain lower copayments than rivals.
3. Henry G. Grabowski, David B. Ridley, and Kevin A. Schulman. "Entry and Competition in Generic Biologics." Managerial and Decision Economics. 2007. Vol. 28: 439-451. (preprint)
   Congress is debating whether biologics can and should be treated like pharmaceuticals with regard to generics. We predict that generic biologics will have high fixed costs from clinical testing and from manufacturing, so there will be less entry than would be expected for generic pharmaceuticals. With fewer generic competitors, generic biologics will be relatively close in price to branded biologics.
4. David B. Ridley and Kirsten Axelsen. "Impact of Medicaid Preferred Drug Lists on Therapeutic Adherence." Pharmacoeconomics. 2006. Vol. 24, Suppl. 3: 65-78.
   Policy makers wanted Alabama Medicaid patients to switch from high-cost to low-cost cholesterol therapy, but by limiting patient choice they had the unintended consequence of lowering adherence to cholesterol therapy, even though these treatments have the potential to improve health and lower costs through lower hospitalizations. Using difference-in-difference estimation we find that 51 percent of patients in Alabama were non-adherent with cholesterol therapy after the policy change compared with 39 percent before. Non-adherence in North Carolina (where there was no policy change) was 36 percent in both periods.

Differential Prices
Do Americans pay higher prices for pharmaceuticals than people in other rich countries? How can we encourage lower prices for poor countries?

1. David B. Ridley. "International Price Comparisons for Novel and Follow-On Drugs." Value in Health. 2007. Vol. 10, No. 6: 510-511.
   Prices for novel drugs tend to be about the same in the U.S. as in other rich countries, prices for less novel drugs tend to be higher in the U.S. than in other rich countries (but this does not account for confidential rebates), and prices for generic drugs tend to be lower in the U.S. than in other rich countries because the large U.S. market attracts many generic competitors which compete down generic prices.
2. Margaret K. Kyle and David B. Ridley. "Would Greater Transparency and Uniformity of Health Care Prices Benefit Poor Patients?" Health Affairs. 2007. Vol. 26, No. 5: 1384-1391.
   Prices are transparent when the buyer knows his or her price or knows prices paid by others, in advance. Transparent prices inform consumers of expected costs and reveal when sellers are charging high prices to poor people. Under some conditions, however, price transparency can increase prices paid by the poor, deter business entry in poor markets, reduce competition, lower investment, and mislead if inaccurately measured by a third party. We recommend alternative approaches to lowering prices for the poor and increasing efficiency.
3. David B. Ridley. "Price Differentiation and Transparency in the Global Pharmaceutical Marketplace." Pharmacoeconomics. 2005. Vol. 23, No. 7: 651-658.
   The World Health Organization's well-meaning effort to compare the price of a given molecule across manufacturers and across countries has insufficient adjustments for drug quality variations; uses price ratios rather than price levels; artificially measures countries’ wealth (for example, using a country’s lowest-paid unskilled government worker); disregards patents; is too slow in adjusting to changes in prices, inflation, and exchange rates; and requires procurement prices which are difficult to obtain since rebates and discounts are often confidential.
4. David B. Ridley and Kevin A. Schulman. "Differential Pricing of Pharmaceuticals in the Internet Age." Journal of Ambulatory Care Management. 2004. Vol. 27, No. 3: 210-214.
   The Internet provides healthcare consumers with more information about available prices and provides pharmaceutical manufacturers with more information about consumers' willingness to pay. The former effect tends to undermine price differences while the latter tends to support them. We expect the former effect to dominate and the Internet to undermine differential pricing of pharmaceuticals.