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

67 Pages Posted: 20 Apr 2021

See all articles by Juan Pablo Atal

Juan Pablo Atal

University of Pennsylvania

José Ignacio Cuesta

Stanford University, Department of Economics

Felipe González

Pontifical Catholic University of Chile - Institute of Economics

Cristóbal Otero

University of California, Berkeley - Department of Economics

Date Written: April 7, 2021

Abstract

We study the economic and political effects of competition by state-owned firms, leveraging the decentralized entry of public pharmacies to local markets in Chile around local elections. Public pharmacies sell drugs at a third of private pharmacy prices, because of a stronger upstream bargaining position and downstream market power in the private sector, but are also of lower quality. Exploiting a field experiment and quasi-experimental variation, we show that public pharmacies affected consumer shopping behavior, inducing market segmentation and price increases in the private sector. This segmentation created winners and losers, as consumers who switched to public pharmacies benefited, whereas consumers who stayed with private pharmacies were harmed. The countrywide entry of public pharmacies would reduce yearly consumer drug expenditure by 1.6 percent, which outweighs the costs of the policy by 52 percent. Mayors that introduced public pharmacies received more votes in the subsequent election, particularly by the target population of the policy.

Keywords: competition, state-owned firms, pharmacies, political returns

JEL Classification: D72, H4, I16, L3

Suggested Citation

Atal, Juan Pablo and Cuesta, José Ignacio and González, Felipe and Otero, Cristóbal, The Economics of the Public Option: Evidence from Local Pharmaceutical Markets (April 7, 2021). Available at SSRN: https://ssrn.com/abstract=3821885 or http://dx.doi.org/10.2139/ssrn.3821885

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)

Felipe González

Pontifical Catholic University of Chile - Institute of Economics ( email )

Casilla 76
Correo 17
Santiago
Chile

Cristóbal Otero

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

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