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The Economics of the Public Option:Evidence from Local Pharmaceutical Markets

Juan Pablo Atal (), Jose Ignacio Cuestaann (), Felipe González and Cristóbal Otero ()
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Juan Pablo Atal: University of Pennsylvania
Jose Ignacio Cuestaann: Stanford University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We study the economic and political e?ects of competition by state-owned firms, leveraging the decentralized entry of public pharmacies to local markets in Chile around local elections. Public pharmacies sell drugs at a third of private pharmacy prices, because of a stronger upstream bargaining position and downstream market power in the private sector, but are also of lower quality. Exploiting a field experiment and quasi-experimental variation, we show that public pharmacies a?ected consumer shopping behavior, inducing market segmentation and price increases in the private sector. This segmentation created winners and losers, as consumers who switched to public pharmacies benefited, whereas consumers who stayed with private pharmacies were harmed. The countrywide entry of public pharmacies would reduce yearly consumer drug expenditure by 1.6 percent, which outweighs the costs of the policy by 52 percent. Mayors that introduced public pharmacies received more votes in the subsequent election, particularly by the target population of the policy.

Keywords: competition; state-owned firms; pharmacies; political returns (search for similar items in EconPapers)
JEL-codes: D72 H4 L3 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2021-04-07
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Working Paper: The Economics of the Public Option: Evidence from Local Pharmaceutical Markets (2022) Downloads
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