In many countries, pharmacies receive high regulated markups and are protected from competition through geographic entry restrictions. We develop an empirical entry model for pharmacies and physicians with two features: entry restrictions and strategic complementarities. We find that the entry restrictions have directly reduced the number of pharmacies by more than 50%, and also indirectly reduced the number of physicians by about 7%. A removal of the entry restrictions, combined with a reduction in the regulated markups, would generate a large shift in rents to consumers, without reducing the availability of pharmacies. The public interest motivation for the current regime therefore has no empirical support.

No abstract

Health care professions have been subject to substantial entry and conduct regulation. Most notably, pharmacies frequently receive high regulated markups over wholesale costs, and are protected from additional competition through geographic entry restrictions. We develop an empirical entry model with two speci…c features: entry by pharmacies may be restricted, and entry decisions of pharmacies and physicians may be strategic complements. We study the case of Belgium, which is representative for many other European countries with geographic entry restrictions. Our estimates imply that the entry restrictions have directly reduced the number of pharmacies by more than 50%, and indirectly reduced the number of physicians by about 7%. Furthermore, a removal of the entry restrictions combined with a reduction in the regulated markups would lead to a large shift in rents to consumers (taxpayers), without necessarily reducing geographic coverage throughout the country. These …ndings show that the public interest motivation for the current regime has no empirical support.

We propose a methodology for estimating the competition e¤ects from entry when …rms sell di¤erentiated products. We …rst derive precise conditions under which Bresnahan and Reiss' entry threshold ratios (ETRs) can be used to test for the presence and to measure the magnitude of competition e¤ects. We then show how to augment the traditional entry model with a revenue equation. This revenue equation serves to adjust the ETRs by the extent of market expansion from entry, and leads to unbiased estimates of the competition e¤ects from entry. We apply our approach to seven di¤erent local service sectors. We …nd that entry typically leads to signi…cant market expansion, implying that traditional ETRs may substantially underestimate the competition e¤ects from entry. In most sectors, the second entrant reduces markups by at least 30%, whereas the third or subsequent entrants have smaller or insigni…cant e¤ects. In one sector, we …nd that even the second entrant does not reduce markups, consistent with a recent decision by the competition authority.

We propose a methodology for estimating the competition e¤ects from entry when …rms sell di¤erentiated products. We …rst derive precise conditions under which Bresnahan and Reiss' entry threshold ratios (ETRs) can be used to test for the presence and to measure the magnitude of competition e¤ects. We then show how to augment the traditional entry model with a revenue equation. This revenue equation serves to adjust the ETRs by the extent of market expansion from entry, and leads to unbiased estimates of the competition e¤ects from entry. We apply our approach to seven di¤erent local service sectors. We …nd that entry typically leads to signi…cant market expansion, implying that traditional ETRs may substantially underestimate the competition e¤ects from entry. In most sectors, the second entrant reduces markups by at least 30%, whereas the third or subsequent entrants have smaller or insigni…cant e¤ects. In one sector, we …nd that even the second entrant does not reduce markups, consistent with a recent decision by the competition authority.