Competitive Bidding in Drug Procurement: Evidence from China

60 Pages Posted: 11 Oct 2021 Last revised: 28 Jan 2022

See all articles by Shengmao Cao

Shengmao Cao

Stanford University, Department of Economics

Xuejie Yi

Stanford University - Department of Economics

Chuan Yu

Stanford University - Department of Economics

Date Written: October 11, 2021

Abstract

We study the impact of competitive bidding in the procurement of off-patent drugs. In 2019, China introduced competitive bidding with a quantity guarantee for thirty-one molecules in nine provinces. Using a difference-in-difference design, we show that the program reduced average drug prices by 47.4%. Generic drug firms won the majority of the bids and on average cut prices by 59.4%. We develop a model of demand and supply to quantify the trade-off between lower prices and choice distortions. Competitive bidding increases consumer welfare if policymakers consider brand preferences welfare irrelevant. The program also reduced government expenditures on insurance by 24.3%.

Keywords: competitive bidding, procurement auctions, drug prices, consumer welfare

JEL Classification: I11, I18, L51

Suggested Citation

Cao, Shengmao and Yi, Xuejie and Yu, Chuan, Competitive Bidding in Drug Procurement: Evidence from China (October 11, 2021). Available at SSRN: https://ssrn.com/abstract=3940088 or http://dx.doi.org/10.2139/ssrn.3940088

Shengmao Cao

Stanford University, Department of Economics ( email )

579 Jan Stanford Way
Stanford, CA CA 94305
United States
6073791116 (Phone)

HOME PAGE: http://web.stanford.edu/~shengmao/

Xuejie Yi (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

Chuan Yu

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

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