Does Regulation Drive Out Competition in Pharmaceutical Markets?

Posted: 11 Jul 2000  

Patricia M. Danzon

University of Pennsylvania - Health Care Systems Department; National Bureau of Economic Research (NBER)

Li-Wei Chao

Population Studies Center

Abstract

Most countries regulate pharmaceutical prices, either directly or indirectly, on the assumption that competition is at best weak in this industry. This paper tests the hypothesis that regulation of manufacturer prices and of retail pharmacy margins undermines price competition. We use data from seven countries for 1992 to examine price competition between generic competitors (different manufacturers of the same compound) and therapeutic substitutes (similar compounds) under different regulatory regimes. We find that price competition between generic competitors is significant in unregulated or less regulated markets (US, UK, Canada, Germany) but that regulation undermines generic competition in strict regulatory systems (France, Italy, Japan). Regulation of retail pharmacy further constrains competition in France, Germany and Italy. Regulation thus undermines the potential for significant savings on off-patent drugs, which account for a large and growing share of drug expenditures. Evidence of competition between therapeutic substitutes is less conclusive due to data limitations.

JEL Classification: L51, L65

Suggested Citation

Danzon, Patricia M. and Chao, Li-Wei, Does Regulation Drive Out Competition in Pharmaceutical Markets?. Journal of Law and Economics, Vol. 43, No. 2, October 2000. Available at SSRN: https://ssrn.com/abstract=231772

Patricia M. Danzon (Contact Author)

University of Pennsylvania - Health Care Systems Department ( email )

3641 Locust Walk
Colonial Penn Center
Philadelphia, PA 19104-6358
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Li-Wei Chao

Population Studies Center ( email )

3718 Locust Walk
School of Arts and Sciences
Philadelphia, PA Pennsylvania 19104-6298
United States
215-898-8483 (Phone)
215-898-2124 (Fax)

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