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

Author

Listed:
  • Juan Pablo Atal
  • José Ignacio Cuesta
  • Felipe González
  • Cristóbal Otero

Abstract

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 1.6 percent.

Suggested Citation

  • Juan Pablo Atal & José Ignacio Cuesta & Felipe González & Cristóbal Otero, 2024. "The Economics of the Public Option: Evidence from Local Pharmaceutical Markets," American Economic Review, American Economic Association, vol. 114(3), pages 615-644, March.
    • Handle: RePEc:aea:aecrev:v:114:y:2024:i:3:p:615-44
    DOI: 10.1257/aer.20211547
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    Cited by:

    1. repec:osf:osfxxx:pjvgd_v1 is not listed on IDEAS
    2. Shen, Menghan & Liang, Xiaoxia & Wu, Han, 2025. "The impact of bioequivalence regulation on pharmaceutical firm outcomes: Evidence from China," Social Science & Medicine, Elsevier, vol. 380(C).
    3. Gonzalez, Felipe & Prem, Mounu, 2025. "Government Support in Times of Crisis: Transfers and the Road to Socialism," OSF Preprints vnz6d_v1, Center for Open Science.
    4. Pablo Muñoz & Cristóbal Otero, 2025. "Managers and Public Hospital Performance," American Economic Review, American Economic Association, vol. 115(11), pages 4040-4074, November.
    5. Haruo Kakehi & Ryo Nakajima, 2025. "Role of Pharmacists in Generic Pharmaceutical Adoption," Keio-IES Discussion Paper Series 2025-001, Institute for Economics Studies, Keio University.
    6. Christopher Neilson & Michael Dinerstein & Sebastián Otero, 2020. "The Equilibrium Effects of Public Provision in Education Markets: Evidence from a Public School Expansion Policy," Working Papers 645, Princeton University, Department of Economics, Industrial Relations Section..
    7. Ninon Moreau-Kastler, 2025. "Proportional Treatment Effects in Staggered Settings: An Approach for Poisson Pseudo-Maximum Likelihood," Working Papers 031, EU Tax Observatory.

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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