Cost Pass-Through, Price Competition, and Market Power in Brick-and-Mortar Pharmacies: Evidence from Germany

Maximilian Maurice Gail ()
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Maximilian Maurice Gail: Chair for Industrial Organization, Regulation and Antitrust, Department of Economics, Justus-Liebig-University Giessen

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: In the German pharmacy market, strictly regulated prescription (Rx) drug prices coexist with free pricing for over-the-counter (OTC) drugs. This paper investigates the extent of market power in the non-prescription segment (OTC drugs and non-pharmaceuticals) and explores the role of Rx drugs in facilitating this. Leveraging nearly a billion daily observations from over 6,300 pharmacies and 213,000 products (2018–2022), this study estimates wholesale-to-retail pass-through rates via an error correction model (ECM) and analyzes product-level markups (Lerner Indices). Results reveal asymmetric pass-through (rockets and feathers): retail prices adjust to cost increases faster than decreases, a dynamic driven by niche products while bestsellers exhibit pricing inertia. Long-run pass-through rates (1.3–1.7) indicate systematic cost overshifting. However, while OTC drugs sustain high long-run markups – corroborated by Lerner Indices that are 35 % higher than those of non-pharmaceuticals – non-pharmaceuticals face more competitive pricing dynamics, passing through cost decreases more aggressively than increases. Furthermore, a spatial analysis reveals that rural pharmacies exhibit higher long-run pass-through rates and appear to compensate for lower transaction volumes (−7.6 %) with markups 8.3 % higher than urban competitors, effectively nullifying aggregate gross profit differences. These spatial dynamics are characterized by rural pharmacies exhibiting greater short-run pricing inertia, followed by stronger long-run pass-through. The findings suggest that pharmacies leverage the regulated Rx segment to facilitate higher markups and systematic overshifting. Consequently, the financial viability of rural networks relies partially on this cross-subsidization from Rx drugs, a model facing risks from increasing digitization.

Keywords: Over-The-Counter Drugs; Cost Pass-Through Estimation; Pharmacy Market; Markups; Error Correction Model; Price Competition; Rockets and Feathers (search for similar items in EconPapers)
JEL-codes: I11 L11 L13 L42 L50 L51 L81 (search for similar items in EconPapers)
Pages: 90 pages
Date: 2026-03-17
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