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Quality Regulation and Competition: Evidence from Pharmaceutical Markets

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  • 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
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    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. 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.
    3. 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).

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    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

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