Quality Regulation and Competition: Evidence from Pharmaceutical Markets
Abstract Quality regulation seeks 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. By exploiting the introduction of bioequivalence in Chile, we find that stronger regulation reduced the number of drugs in the market by 18% and increased average paid prices by 13%. We estimate a mo
Abstract Quality regulation seeks 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. By exploiting the introduction of bioequivalence in Chile, we find that stronger regulation reduced the number of drugs in the market by 18% and increased average paid prices by 13%. We estimate a model of drug entry, certification, and demand to study how drug quality, aversion to generics, and certification costs shape the equilibrium effects of quality regulation. We find that quality regulation increased demand for generic drugs by resolving asymmetric information and reducing aversion to unbranded generics, which induced the 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 with alternative designs of quality regulation, including quality disclosure.