Working Paper: CEPR ID: DP9881
Authors: Pierre Dubois; Laura Lasio
Abstract: We provide a method allowing to identify 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, which is heavily regulated in some countries, and particularly in France. We use data from the US, Germany and France to identify country-specific demand models and then recover price cost margins under the regulated price setting constraints on the French market. To do so, we estimate a structural model on the market for anti-ulcer drugs that allows us to explore the drivers of demand, to identify whether regulation in France truly affects margins and prices and to relate regulatory reforms to industry pricing equilibrium. 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. Empirical results show that margins have increased over time in France but that firms were especially constrained in price setting after the different reforms in price setting that occurred in 2004. Counterfactual simulations show that overall total spending has significantly increased over the 2004-2007 period because of new regulation of price setting that reduced branded drugs prices but increased sales quantities by displacing part of the demand from generics to branded drugs.
Keywords: antiulcer drugs; Bertrand competition; empirical IO; pharmaceuticals; price constraints; regulation
JEL Codes: C18; I18; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory reforms instituted in 2004 (G18) | Total spending on pharmaceuticals (H51) |
| New regulations that reduced prices for branded drugs (L51) | Sales quantities (C69) |
| Regulatory reforms (G18) | Demand shift from generics to branded drugs (L65) |
| Regulatory constraints in the French pharmaceutical market (L65) | Price setting (L11) |
| Regulatory constraints in the French pharmaceutical market (L65) | Margins (Y10) |
| Regulatory reforms instituted in 2004 (G18) | Margins in France (F55) |
| Regulatory environment (G38) | Pricing strategies of pharmaceutical firms (L11) |