Quality Regulation and Competition: Evidence from Pharmaceutical Markets
Quality regulation attempts to ensure quality and to foster price competition by reducing vertical diﬀerentiation, but may also have unintended consequences through its eﬀects on market structure. We study these eﬀects in the context of pharmaceutical bioequivalence, which is the primary quality standard for generic drugs. Exploiting the staggered phase-in of bioequivalence requirements in Chile, we show that stronger quality regulation decreased the number of drugs in the market by 25%, increased average paid prices by 10%, decreased total sales by 20%, and did not have a significant eﬀect on observed outcomes related to drug quality. These adverse eﬀects were concentrated among small markets. Our results suggest that the intended eﬀects of quality regulation on price competition through increased (perceived) quality of generics were overturned by adverse competitive eﬀects arising from the costs of complying with the regulation.