Credence Goods and Market Power: An Econometric Study on the Brazilian Pharmaceutical Industry

Abstract:     
The Brazilian pharmaceutical industry has always been targeted by the society, due to the ethical drugs' high weight in the families' consumption budgets (especially within the poorer ones) and price raises traditionally above inflation (when the government does not run a price control). The present article aims to organize the debate on regulation for this industry. We review the literature on market failures and regulation solutions adopted for this industry worldwide and try to relate empirically drug prices to some explaining variables, based on original microdata. We find that, similarly to previous U.S. estimations, Brazilian leading brand name drugs - before a 1999 law, which created officially the generic drug defined by its bioequivalence to the reference drug, and a massive advertisement campaign for spreading use of generic drugs, run by the Ministry of Health - accommodated entry and share growth of the followers by raising their prices and retreating to a more inelastic market segment. On the other hand, followers reduce relative prices when they lose market. Therefore, a fall of the concentration index in a particular segment has ambiguous effects: if it is due to reduced leader power, followers raise their relative prices; if it is due to a tougher competition within the fringe, relative prices tend to go down.

Keywords: Brazilian pharmaceutical industry; generic drugs; product differentiation

JEL Classifications: L65, C23, D82, I18, L15, L43

Working Paper Series