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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 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.

Suggested Citation

  • 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.
  • Handle: RePEc:tse:wpaper:27919
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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. 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.
    5. 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. 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.
    3. 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.
    4. Castanheira, Micael & Ornaghi, Carmine & Siotis, Georges, 2019. "The unexpected consequences of generic entry," Journal of Health Economics, Elsevier, vol. 68(C).
    5. Atal, Juan Pablo & Cuesta, Jose Ignacio & Sæthre, Morten, 2018. "Quality Regulation and Competition: Evidence from Pharmaceutical Markets," Research Department working papers 1211, CAF Development Bank Of Latinamerica.
    6. 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.
    7. Jiekai ZHANG, 2016. "The impact of advertising length caps on TV: Evidence from the French broadcast TV industry," Working Papers 16-06, NET Institute.
    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. 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.
    10. Suppliet, Moritz, 2020. "Umbrella branding in pharmaceutical markets," Journal of Health Economics, Elsevier, vol. 73(C).
    11. repec:iae:iaewps:wp2016n8 is not listed on IDEAS
    12. 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.

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    More about this item

    Keywords

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

    JEL classification:

    • 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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