Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals
We provide a method allowing identification of 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. 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. We use the market for anti-ulcer drugs to identify whether regulation in France truly affects margins and prices and relate regulatory reforms to industry pricing equilibrium. Empirical results show that firms were especially constrained in price setting after the different reforms in 2004. Counterfactual simulations show that total spending significantly increased because of the new price regulation by displacing part of the demand from generics to branded drugs.
|Date of creation:||Feb 2014|
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- Reynaert, Mathias & Verboven, Frank, 2012. "Improving the Performance of Random Coefficients Demand Models: the Role of Optimal Instruments," CEPR Discussion Papers 9026, C.E.P.R. Discussion Papers.
- Mathias REYNAERT & Frank VERBOVEN, 2012. "Improving the performance of random coefficients demand models: the role of optimal instruments," Working Papers Department of Economics ces12.07, KU Leuven, Faculty of Economics and Business, Department of Economics.
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European Economic Review,
Elsevier, vol. 61(C), pages 116-131.
- Brekke, Kurt Richard & Holmås, Tor Helge & Straume, Odd Rune, 2010. "Margins and Market Shares: Pharmacy Incentives for Generic Substitution," Discussion Paper Series in Economics 18/2010, Department of Economics, Norwegian School of Economics.
- Kurt R. Brekke & Tor Helge Holmås & Odd Rune Straume, 2010. "Margins and Market Shares:Pharmacy Incentives for Generic Substitution," NIPE Working Papers 20/2010, NIPE - Universidade do Minho.
- Kurt R. Brekke & Tor Helge HolmÃ¥s & Odd Rune Straume, 2012. "Margins and Market Shares: Pharmacy Incentives for Generic Substitution," CESifo Working Paper Series 4055, CESifo Group Munich.
- 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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