Entry and price competition in the over-the-counter drug market after deregulation: evidence from Portugal

Abstract

In the last two decades, many European countries allowed the sale of Over-the-Counter (OTC) drugs outside pharmacies. This was expected to lower retail prices through increased competition. However, evidence of price reductions is scarce. We assess the impact of supermarket and outlet entry in the OTC drug market on OTC prices charged by incumbent pharmacies, using a difference-in-differences strategy. We use price data on five popular OTC drugs for all retailers located in Lisbon for three distinct points in time (2006, 2010, and 2015). Our results suggest that competitive pressure in the market is mainly exerted by supermarkets, which charge, on average, 20% lower prices than pharmacies. The entry of a supermarket among the main competitors of an incumbent pharmacy is associated with an average 3 to 9% decrease in prices compared to the control group. These price reductions are long-lasting, but fairly localized. We find no evidence of price reductions following outlet entry. Additional results from a reduced-form entry model and a propensity score matching difference-in-differences approach suggest that these effects are causal.

Publication
Working paper
Date