Equilibrium Transition from Loss-Leader Competition: How Advertising Restrictions Facilitate Price Coordination in Chilean Pharmaceutical Retail

Yu Hao

Papers from arXiv.org

Abstract: This paper examines how regulation can push an oligopoly from one pricing regime to another. It uses rich data from Chilean pharmacy chains to study a ban on comparative price advertising. Before the ban, ads created demand spillovers across products, making aggressive loss-leader pricing profitable. Once these spillovers were removed, selling below cost became unattractive for any firm, and prices quickly shifted to a coordinated, higher level. A structural demand model shows that the ban reduced both price elasticity and cross-product spillovers, and counterfactuals indicate that the loss of spillovers, rather than just lower elasticity, mainly explains the move to the new coordinated pricing regime. The results show how well intentioned regulation can unintentionally promote price coordination by weakening the mechanisms that support competitive outcomes.

Date: 2025-12
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