Regulated Prices, Global Capacity, and Drug Shortages

Drug shortages affect most pharmaceutical markets. We develop a model of capacity choice for a firm supplying multiple countries under regulated prices, in which supply shocks generate shortages: the highest-price countries remain fully served, middle-price countries are rationed, and the lowest-price countries are excluded, so that domestic and foreign prices affect both the frequency and the magnitude of shortages. We then develop a method to detect shortages and measure their magnitude using only national sales data. Applying it to monthly pharmacy sales in France over 2019-2024, we find an average shortage probability of 26%. Higher French prices reduce both the probability and the magnitude of shortages in France. Higher UK prices reduce the probability of French shortages but increase their magnitude, while higher Polish prices reduce both, consistent with the capacity and allocation channels of the model. Counterfactuals on antipsychotics show that targeted price increases can substantially reduce shortages at limited expenditure cost.