Quality Regulation and Competition: Evidence from Pharmaceutical Markets

82 Pages Posted: 10 Oct 2018 Last revised: 9 Mar 2022

See all articles by Juan Pablo Atal

Juan Pablo Atal

University of Pennsylvania

José Ignacio Cuesta

Stanford University, Department of Economics

Morten Sæthre

Norwegian School of Economics (NHH)

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2022

Abstract

Quality regulation attempts to ensure quality and to foster competition by reducing
vertical differentiation, but may also have unintended consequences through its effects on
market structure. We study this trade-off in the context of pharmaceutical bioequivalence,
which is the primary quality standard for generic drugs. Exploiting the staggered phase-in of
bioequivalence requirements in Chile, we show that stronger regulation decreased the number
of drugs in the market by 25% and increased average paid prices by 9%. These adverse
effects were concentrated among small markets, suggesting that compliance costs played an
important role. We estimate a structural model with endogenous entry and certification to
study the role of drug quality, aversion against generics, and certification costs in shaping the
equilibrium effects of quality regulation. We find that quality regulation increased consumer
valuation of generic drugs through reducing asymmetric information and aversion against
unbranded generics, which induced entry of high-quality products in place of low-quality
products. Consumer welfare increased despite higher prices and a lower number of firms.

Keywords: quality regulation, competition, bioequivalence, generic drugs

JEL Classification: I11, L11, L15

Suggested Citation

Atal, Juan Pablo and Cuesta, José Ignacio and Sæthre, Morten, Quality Regulation and Competition: Evidence from Pharmaceutical Markets (February 1, 2022). Available at SSRN: https://ssrn.com/abstract=3255853 or http://dx.doi.org/10.2139/ssrn.3255853

Juan Pablo Atal

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

José Ignacio Cuesta (Contact Author)

Stanford University, Department of Economics ( email )

579 Jane Stanford Way
Stanford, CA CA 94305
United States
94305-6015 (Fax)

Morten Sæthre

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

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