The Economics of the Public Option: Evidence from Local Pharmaceutical Markets
79 Pages Posted: 20 Apr 2021 Last revised: 13 Dec 2022
Date Written: December 11, 2022
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 market power in the private sector, but are of lower quality. Public pharmacies induced market segmentation and price increases in the private sector, which beneﬁted the switchers to the public option but harmed the stayers. The countrywide entry of public pharmacies would reduce yearly consumer drug expenditure by 1.5 percent.
Keywords: competition, state-owned firms, pharmacies
JEL Classification: D72, H4, I16, L3
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