The Economics of the Public Option: Evidence from Local Pharmaceutical Markets
68 Pages Posted: 20 Apr 2021 Last revised: 21 Oct 2021
Date Written: October 20, 2021
We study the eﬀects of competition by state-owned ﬁrms, leveraging the decentralized entry of public pharmacies to local markets in Chile. Public pharmacies sell the same drugs at a third of private pharmacy prices, because of stronger upstream bargaining and downstream market power in the private sector, but are of lower quality. Public pharmacies induced market segmentation and price increases in the private sector, beneﬁting the switchers to the public option but harming the stayers. 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.
Keywords: competition, state-owned firms, pharmacies
JEL Classification: D72, H4, I16, L3
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