The effects of price regulation of pharmaceutical industry margins: A structural estimation for anti-ulcer drugs in France

Pierre Dubois (Toulouse) & Laura Lasio (Toulouse) describeThe effects of price regulation of pharmaceutical industry margins: A structural estimation for anti-ulcer drugs in France

ABSTRACT: The objective of this paper is to study the e¤ects of price regulation on competition in the pharmaceutical industry. We provide a method allowing to identify margins in an oligopoly price competition game even when prices may not be freely chosen by Â…firms. We use our identiÂ…cation strategy to study the e¤ects of regulatory constraints on prices in the pharmaceutical industry which is heavily regulated in particular in France. We use data from the US, Germany and France to identify country speciÂ…c 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 in France that allows us to explore the drivers of demand, to identify whether regulation really a¤ects margins and prices and to relate regulatory reforms to industry pricing equilibrium. We provide the Â…rst 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 di¤erent markets (US, German and France) with varying regulatory constraints. The identiÂ…ed margins show that margins have increased over time in France but that Â…rms were specially constrained in price setting after 2004.