Does Regulation Drive Out Competition in Pharmaceutical Markets?

Abstract

Most countries regulate pharmaceutical prices, either directly or indirectly, on the assumption that competition is at best weak in this industry. This paper tests the hypothesis that regulation of manufacturer prices and of retail pharmacy margins undermines price competition. We use data from seven countries for 1992 to examine price competition between generic competitors (different manufacturers of the same compound) and therapeutic substitutes (similar compounds) under different regulatory regimes. We find that price competition between generic competitors is significant in unregulated or less regulated markets (US, UK, Canada, Germany) but that regulation undermines generic competition in strict regulatory systems (France, Italy, Japan). Regulation of retail pharmacy further constrains competition in France, Germany and Italy. Regulation thus undermines the potential for significant savings on off-patent drugs, which account for a large and growing share of drug expenditures. Evidence of competition between therapeutic substitutes is less conclusive due to data limitations.

JEL Classification: L51, L65