Quality Regulation and Competition: Evidence from Pharmaceutical Markets

Abstract

We study the equilibrium effects of quality regulation on market outcomes by exploiting the staggered phase-in of bioequivalence requirements for generic drugs in Chile. While the objective of the regulation was to increase the perceived quality of generics to reduce vertical differentiation and enhance price competition, we find mostly adverse effects. Even if a large number of drugs obtained the quality certification mandated by the regulation, we estimate that the number of drugs in the market decreased by 13% as a result of the policy. Moreover, we find that prices increased on average by 13% as well as no significant effects on the market share of generics. These adverse effects were mostly concentrated in molecules with small market size. Put together, our results suggest that the intended effects of the regulation on competition through increased (perceived) quality of generics were overturned by adverse competitive effects arising from the costs of complying with the regulation. Small sections of text, that are less than two paragraphs, may be quoted without explicit permission as long as this document is stated. Findings, interpretations and conclusions expressed in this publication are the sole responsibility of its author(s), and it cannot be, in any way, attributed to CAF, its Executive Directors or the countries they represent. CAF does not guarantee the accuracy of the data included in this publication and is not, in any way, responsible for any consequences resulting from its use.

The Economics of the Public Option: Evidence from Local Pharmaceutical Markets

“…As we document in section 5.1, public pharmacy prices are on average around a third of private pharmacy prices. These differences are larger for branded than generic drugs, partly because the former are substantially more expensive in private pharmacies (Atal et al, 2019).…”

“…To further study the effect of public pharmacies on prices, we adapt the decomposition developed by Atal et al (2019) to our setting. This procedure decomposes the evolution of average paid prices on terms associated with price changes-the result we report in the main text-, share changes, the correlation between those, product entry and product exit.…”

“…Moura and Barros (2020) studies the price effects of introducing competition in the market for OTC drugs, while Bennett and Yin (2019) studies the price and quality effects of the entry of retail chain pharmacies into a market dominated by low-quality firms. Other body of research focuses on the effects of different policies to lower drug prices, including price regulation (Mohapatra and Chatterjee, 2020), quality regulation (Atal et al, 2019) and public procurement (Dubois et al, 2019;Brugués, 2020). We provide novel evidence of how public competition in the retail pharmaceutical market affects equilibrium market outcomes.…”

“…Because these weights are constant, changes in the index are driven by changes in prices and not by changes in market shares or in the market structure. This price index has been previously used in the literature that studies retail pricing (e.g.,Atal et al, 2019). For sales, we use the residuals from the projection of the outcome variable on month-of-the-year fixed effects by molecule-location to account for seasonality that is specific to sales in some locations (e.g., due to tourism in summer).19 We use a balanced sample of locations in event time, and include never-treated locations to pin down the linear component of pre-trends(Borusyak and Jaravel, 2018).…”

“…For completeness, we report results of equation (3) using exposure to the first public pharmacy only in TableA.5, for which results are almost the same.24 We provide additional results on price effects in Appendix A.2. In particular, we provide results from a decomposition developed byAtal et al (2019) for the effects of public pharmacies on average paid prices for drugs in molecule-location. Average paid prices increased by 1.7 percent following the entry of public pharmacies, such that price changes by private pharmacies were indeed the main driver of such change.…”