Competitive Bidding in Drug Procurement: Evidence from China

74 Pages Posted: 11 Oct 2021 Last revised: 27 Mar 2023

See all articles by Shengmao Cao

Shengmao Cao

Kellogg School of Management

Xuejie Yi

Stanford University - Department of Economics

Chuan Yu

Stanford University - Department of Economics

Date Written: October 18, 2022

Abstract

We study the equilibrium effects of introducing competitive bidding in drug procurement. In 2019, China introduced a competitive bidding program where drug companies bid for a prespecified procurement quantity in nine provinces. Using a difference-in-differences design, we show that the program reduced average drug prices by 47.4%. Generic drugs won most bids and cut prices by 75.0%. We develop an equilibrium model to quantify the trade-off between lower prices and potential choice distortions. Competitive bidding increases consumer welfare if policymakers believe consumers should value branded and bioequivalent generic drugs equally. The program also reduced government expenditure on insurance by 19.8%.

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 18, 2022). Available at SSRN: https://ssrn.com/abstract=3940088 or http://dx.doi.org/10.2139/ssrn.3940088

Shengmao Cao

Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States
6073791116 (Phone)

HOME PAGE: http://https://www.shengmao-cao.com/

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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