IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/30325.html
   My bibliography  Save this paper

Quality Regulation and Competition: Evidence from Pharmaceutical Markets

Author

Listed:
  • Juan Pablo Atal
  • José Ignacio Cuesta
  • Morten Sæthre

Abstract

Quality regulation attempts to ensure quality and foster competition by reducing vertical differentiation, but it may also have adverse effects on market structure. We study this trade-off in the context of pharmaceutical bioequivalence, which is the primary quality standard for generic drugs. Exploiting the introduction of bioequivalence in Chile, we find that stronger regulation decreased the number of drugs in the market by 21% and increased average paid prices by 13%. We estimate a model of drug entry, certification, and demand to study the role of drug quality, aversion against generics, and certification costs in shaping the equilibrium effects of quality regulation. We find that quality regulation increased demand for generic drugs by resolving asymmetric information and reducing aversion against unbranded generics, which induced entry of high-quality drugs in place of low-quality drugs. Consumer welfare increased despite higher prices and a lower number of firms. We compare minimum quality standards to quality disclosure and other designs of quality regulation.

Suggested Citation

  • Juan Pablo Atal & José Ignacio Cuesta & Morten Sæthre, 2022. "Quality Regulation and Competition: Evidence from Pharmaceutical Markets," NBER Working Papers 30325, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30325
    Note: EH IO
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w30325.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mark Duggan & Craig Garthwaite & Aparajita Goyal, 2016. "The Market Impacts of Pharmaceutical Product Patents in Developing Countries: Evidence from India," American Economic Review, American Economic Association, vol. 106(1), pages 99-135, January.
    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. Paolo Garella & Emmanuel Petrakis, 2008. "Minimum quality standards and consumers’ information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 36(2), pages 283-302, August.
    4. Pierre Dubois & Laura Lasio, 2018. "Identifying Industry Margins with Price Constraints: Structural Estimation on Pharmaceuticals," American Economic Review, American Economic Association, vol. 108(12), pages 3685-3724, December.
    5. Lee Branstetter & Chirantan Chatterjee & Matthew J. Higgins, 2016. "Regulation and welfare: evidence from paragraph IV generic entry in the pharmaceutical industry," RAND Journal of Economics, RAND Corporation, vol. 47(4), pages 857-890, November.
    6. David Dranove & Ginger Zhe Jin, 2010. "Quality Disclosure and Certification: Theory and Practice," Journal of Economic Literature, American Economic Association, vol. 48(4), pages 935-963, December.
    7. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 75-90, March.
    8. Crampes, Claude & Hollander, Abraham, 1995. "Duopoly and quality standards," European Economic Review, Elsevier, vol. 39(1), pages 71-82, January.
    9. Dubois, Pierre & Lasio, Laura, 2014. "Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals," TSE Working Papers 14-471, Toulouse School of Economics (TSE), revised Mar 2018.
    10. Atanu Saha & Henry Grabowski & Howard Birnbaum & Paul Greenberg & Oded Bizan, 2006. "Generic Competition in the US Pharmaceutical Industry," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 13(1), pages 15-38.
    11. Patrick Kline & Neviana Petkova & Heidi Williams & Owen Zidar, 2019. "Who Profits from Patents? Rent-Sharing at Innovative Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(3), pages 1343-1404.
    12. Duarte, Fabian, 2012. "Price elasticity of expenditure across health care services," Journal of Health Economics, Elsevier, vol. 31(6), pages 824-841.
    13. Darius N. Lakdawalla, 2018. "Economics of the Pharmaceutical Industry," Journal of Economic Literature, American Economic Association, vol. 56(2), pages 397-449, June.
    14. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    15. Neha Bairoliya & Pinar Karaca-Mandic & Jeffrey S. McCullough & Amil Petrin, 2017. "Consumer Learning and the Entry of Generic Pharmaceuticals," NBER Working Papers 23662, National Bureau of Economic Research, Inc.
    16. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2003. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," American Economic Review, American Economic Association, vol. 93(1), pages 15-37, March.
    17. Bart J. Bronnenberg & Jean-Pierre Dubé & Matthew Gentzkow & Jesse M. Shapiro, 2015. "Do Pharmacists Buy Bayer? Informed Shoppers and the Brand Premium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(4), pages 1669-1726.
    18. Scarpa, Carlo, 1998. "Minimum quality standards with more than two firms1," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 665-676, September.
    19. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    20. Boyan Jovanovic, 1982. "Truthful Disclosure of Information," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 36-44, Spring.
    21. Ginger Zhe Jin & Phillip Leslie, 2003. "The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(2), pages 409-451.
    22. Danzon, Patricia M & Chao, Li-Wei, 2000. "Does Regulation Drive out Competition in Pharmaceutical Markets?," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 311-357, October.
    23. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
    24. Fiona M. Scott Morton, 1999. "Entry Decisions in the Generic Pharmaceutical Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 421-440, Autumn.
    25. Fiona M. Scott Morton, 1999. "Entry Decisions in the Generic Pharmaceutical Industry," Yale School of Management Working Papers ysm119, Yale School of Management.
    26. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Geng, Hao & Shi, Ce Matthew, 2024. "Health policy, price regulation, and innovation: Evidence from China’s vaccine industry," Journal of Development Economics, Elsevier, vol. 167(C).
    3. Chatterjee, Chirantan & Gupta, Samarth, 2024. "Public entry and private prices: New evidence from Indian pharmaceutical markets," Journal of Economic Behavior & Organization, Elsevier, vol. 219(C), pages 473-489.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Min Chen & Konstantinos Serfes, 2012. "Minimum quality standard regulation under imperfect quality observability," Journal of Regulatory Economics, Springer, vol. 41(2), pages 269-291, April.
    2. Olivier Bonroy & Christos Constantatos, 2015. "On the Economics of Labels: How Their Introduction Affects the Functioning of Markets and the Welfare of All Participants," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(1), pages 239-259.
    3. Lee Branstetter & Chirantan Chatterjee & Matthew J. Higgins, 2016. "Regulation and welfare: evidence from paragraph IV generic entry in the pharmaceutical industry," RAND Journal of Economics, RAND Corporation, vol. 47(4), pages 857-890, November.
    4. repec:gbl:wpaper:2013-01 is not listed on IDEAS
    5. Joan Costa-i-Font & Alistair McGuire & Nebibe Varol, 2011. "Does Pharmaceutical Price Regulation Affect the Adoption of Generic Competition? Evidence from the OECD, 1999-2008," CESifo Working Paper Series 3441, CESifo.
    6. Iván Moreno-Torres & Jaume Puig-Junoy & Joan-Ramon Borrell, 2009. "Generic Entry into the Regulated Spanish Pharmaceutical Market," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(4), pages 373-388, June.
    7. Aljoscha Janssen, 2022. "Price dynamics of Swedish pharmaceuticals," Quantitative Marketing and Economics (QME), Springer, vol. 20(4), pages 313-351, December.
    8. Stefan Lutz & Mario Pezzino, 2012. "International Strategic Choice of Minimum Quality Standards and Welfare," Journal of Common Market Studies, Wiley Blackwell, vol. 50(4), pages 594-613, July.
    9. Lee, Chung-Ying, 2020. "Pricing strategy and moral hazard: Copay coupons in pharmaceuticals," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    10. Clark, Robert & Fabiilli, Christopher & Lasio, Laura, 2022. "Collusion in the US generic drug industry," International Journal of Industrial Organization, Elsevier, vol. 85(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. Garella, Paolo G. & Lambertini, Luca, 2014. "Bidimensional vertical differentiation," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 1-10.
    13. Paolo Garella & Emmanuel Petrakis, 2008. "Minimum quality standards and consumers’ information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 36(2), pages 283-302, August.
    14. Garella, Paolo G., 2006. ""Innocuous" minimum quality standards," Economics Letters, Elsevier, vol. 92(3), pages 368-374, September.
    15. Stefan Napel & Gunnar Oldehaver, 2011. "A dynamic perspective on minimum quality standards under Cournot competition," Journal of Regulatory Economics, Springer, vol. 39(1), pages 29-49, February.
    16. Patricia M. Danzon & Michael F. Furukawa, 2011. "Cross-National Evidence on Generic Pharmaceuticals: Pharmacy vs. Physician-Driven Markets," NBER Working Papers 17226, National Bureau of Economic Research, Inc.
    17. Costa-Font, Joan & McGuire, Alistair & Varol, Nebibe, 2014. "Price regulation and relative delays in generic drug adoption," Journal of Health Economics, Elsevier, vol. 38(C), pages 1-9.
    18. Cédric Argenton, 2010. "Exclusive Quality," Journal of Industrial Economics, Wiley Blackwell, vol. 58(3), pages 690-716, September.
    19. Eric Giraud-Héraud & Cristina Grazia & Abdelhakim Hammoudi, 2012. "Explaining the Emergence of Private Standards in Food Supply Chains," Working Papers hal-00749345, HAL.
    20. Olivier Bonroy, 2006. "Le standard de qualité minimale est-il un instrument socialement optimal ?. Une revue de littérature," Revue économique, Presses de Sciences-Po, vol. 57(1), pages 35-53.
    21. Newham, M. & Seldeslachts, J. & Banal-Estanol, A., 2018. "Common Ownership and Market Entry: Evidence from the Pharmaceutical Industry," Working Papers 18/03, Department of Economics, City University London.

    More about this item

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:30325. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.