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Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals

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  • Dubois, Pierre
  • Lasio, Laura

Abstract

We provide a method allowing to identify margins in an oligopoly price competition game when prices may not be freely chosen in some markets, for example due to regulation. We use our identification strategy to study the effects of regulatory constraints in the pharmaceutical industry, which is heavily regulated in some countries, and particularly in France. We use data from the US, Germany and France to identify country-specific demand models and then recover price cost margins under the regulated price setting constraints on the French market. To do so, we estimate a structural model on the market for anti-ulcer drugs that allows us to explore the drivers of demand, to identify whether regulation in France truly affects margins and prices and to relate regulatory reforms to industry pricing equilibrium. We provide the first structural estimation of price-cost margins on a regulated market with price constraints and show how to identify unknown possibly binding constraints thanks to three different markets (US, Germany and France) with varying regulatory constraints. Empirical results show that margins have increased over time in France but that firms were especially constrained in price setting after the different reforms in price setting that occurred in 2004. Counterfactual simulations show that overall total spending has significantly increased over the 2004-2007 period because of new regulation of price setting that reduced branded drugs prices but increased sales quantities by displacing part of the demand from generics to branded drugs.

Suggested Citation

  • Dubois, Pierre & Lasio, Laura, 2014. "Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals," CEPR Discussion Papers 9881, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9881
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    References listed on IDEAS

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    1. Reynaert, Mathias & Verboven, Frank, 2014. "Improving the performance of random coefficients demand models: The role of optimal instruments," Journal of Econometrics, Elsevier, vol. 179(1), pages 83-98.
    2. Brekke, Kurt Richard & Holmås, Tor Helge & Straume, Odd Rune, 2013. "Margins and market shares: Pharmacy incentives for generic substitution," European Economic Review, Elsevier, vol. 61(C), pages 116-131.
    3. Margaret K. Kyle, 2007. "Pharmaceutical Price Controls and Entry Strategies," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 88-99, February.
    4. Rizzo, John A, 1999. "Advertising and Competition in the Ethical Pharmaceutical Industry: The Case of Antihypertensive Drugs," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 89-116, April.
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    Citations

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    Cited by:

    1. Susan J. Méndez, 2016. "Parallel Trade of Pharmaceuticals: The Danish Market for Statins," Melbourne Institute Working Paper Series wp2016n08, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    2. Atal, Juan Pablo & Cuesta, José Ignacio & Sæthre, Morten, 2018. "Quality Regulation and Competition: Evidence from Pharmaceutical Markets," Discussion Paper Series in Economics 20/2018, Norwegian School of Economics, Department of Economics.
    3. Jiekai ZHANG, 2016. "The impact of advertising length caps on TV: Evidence from the French broadcast TV industry," Working Papers 16-06, NET Institute.
    4. D’Haultfoeuille, Xavier & Durrmeyer, Isis & Février, Philippe, 2014. "Automobile Prices in Market Equilibrium with Unobserved Price Discrimination," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 477, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    5. Kaiser, Ulrich & Mendez, Susan J. & Rønde, Thomas & Ullrich, Hannes, 2014. "Regulation of pharmaceutical prices: Evidence from a reference price reform in Denmark," Journal of Health Economics, Elsevier, vol. 36(C), pages 174-187.
    6. Suppliet, Moritz, 2017. "Umbrella Branding in Pharmaceutical Markets," Discussion Paper 2017-034, Tilburg University, Tilburg Law and Economic Center.
    7. repec:iae:iaewps:wp2016n8 is not listed on IDEAS
    8. Arcidiacono, Peter & Ellickson, Paul B. & Landry, Peter & Ridley, David B., 2013. "Pharmaceutical followers," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 538-553.

    More about this item

    Keywords

    antiulcer drugs; Bertrand competition; empirical IO; pharmaceuticals; price constraints; regulation;

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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