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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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    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.
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    6. 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.
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    8. Ching, Andrew T. & Hermosilla, Manuel & Liu, Qiang, 2019. "Structural Models of the Prescription Drug Market," Foundations and Trends(R) in Marketing, now publishers, vol. 13(1), pages 1-1–76, December.
    9. 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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    Cited by:

    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. Pierre Dubois & Morten Sæthre, 2020. "On the Effect of Parallel Trade on Manufacturers' and Retailers' Profits in the Pharmaceutical Sector," Econometrica, Econometric Society, vol. 88(6), pages 2503-2545, November.
    3. Castanheira, Micael & Ornaghi, Carmine & Siotis, Georges, 2019. "The unexpected consequences of generic entry," Journal of Health Economics, Elsevier, vol. 68(C).
    4. Philippe Choné & Lionel Wilner, 2015. "Complementarity or substitutability in networks? Methodology and application to the hospital industry," Working Papers 2015-07, Center for Research in Economics and Statistics.
    5. Susan J. Méndez, 2018. "Parallel trade of pharmaceuticals: The Danish market for statins," Health Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 333-356, February.
    6. 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.
    7. 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.
    8. Xavier D’Haultfœuille & Isis Durrmeyer & Philippe Février, 2019. "Automobile Prices in Market Equilibrium with Unobserved Price Discrimination," Review of Economic Studies, Oxford University Press, vol. 86(5), pages 1973-1998.
    9. Dubois, Pierre & Gandhi, Ashvin & Vasserman, Shoshana, 2022. "Bargaining and International Reference Pricing in the Pharmaceutical Industry," TSE Working Papers 22-1338, Toulouse School of Economics (TSE).
    10. Suppliet, Moritz, 2020. "Umbrella branding in pharmaceutical markets," Journal of Health Economics, Elsevier, vol. 73(C).
    11. 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.
    12. Callejas, Jerónimo & Mohapatra, Debi Prasad, 2021. "Welfare effects of public procurement of medicines: Evidence from Ecuador," International Journal of Industrial Organization, Elsevier, vol. 75(C).
    13. Philippe Choné & Lionel Wilner, 2015. "Complementarity or substitutability in networks? Methodology and application to the hospital industry," Working Papers 2015-07, Center for Research in Economics and Statistics.
    14. Jiekai ZHANG, 2016. "The impact of advertising length caps on TV: Evidence from the French broadcast TV industry," Working Papers 16-06, NET Institute.
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    16. Robert Clark & Christopher Anthony Fabiilli & Laura Lasio, 2021. "Collusion in the US Generic Drug Industry," Working Paper 1474, Economics Department, Queen's University.

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    More about this item

    Keywords

    antiulcer drugs; Bertrand competition; empirical IO; pharmaceuticals; price constraints; regulation;
    All these keywords.

    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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