Quality Regulation and Competition: Evidence from Pharmaceutical Markets
16 March, 2022 13:00 hrs
Authors:
Juan Pablo Atal, Jose Ignacio Cuesta, and Morten Saethre.
Abstract.
Quality regulation attempts to ensure quality and to foster competition by reducing vertical differentiation, but may also have unintended consequences through its 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 staggered phase-in of bioequivalence requirements in Chile, we show that stronger regulation decreased the number of drugs in the market by 25% and increased average paid prices by 9%. These adverse effects were concentrated among small markets, suggesting that compliance costs played an important role. We estimate a structural model with endogenous entry and certification 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 consumer valuation of generic drugs through reducing asymmetric information and aversion against unbranded generics, which induced entry of high-quality products in place of low-quality products. Consumer welfare increased despite higher prices and a lower number of firms.
Location:
Sala de Consejo, Beauchef 851, piso 4 | Departamento de Ingeniería Industrial, UCHILE
Speaker:
José Ignacio Cuesta
MIPP Chile 2024