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American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

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

  • Juan Pablo Atal
  • José Ignacio Cuesta
  • Felipe González
  • Cristóbal Otero
American Economic Review
vol. 114, no. 3, March 2024
(pp. 615–44)
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Abstract

We study the effects of competition by state-owned firms, leveraging the decentralized entry of public pharmacies to local markets in Chile. Public pharmacies sell the same drugs at a third of private pharmacy prices, because of stronger upstream bargaining and market power in the private sector, but are of lower quality. Public pharmacies induced market segmentation and price increases in the private sector, which benefited the switchers to the public option but harmed the stayers. The countrywide entry of public pharmacies would reduce yearly consumer drug expenditure by 1.6 percent.

Citation

Atal, Juan Pablo, José Ignacio Cuesta, Felipe González, and Cristóbal Otero. 2024. "The Economics of the Public Option: Evidence from Local Pharmaceutical Markets." American Economic Review, 114 (3): 615–44. DOI: 10.1257/aer.20211547

Additional Materials

JEL Classification

  • D22 Firm Behavior: Empirical Analysis
  • I18 Health: Government Policy; Regulation; Public Health
  • L32 Public Enterprises; Public-Private Enterprises
  • L65 Chemicals; Plastics; Rubber; Drugs; Biotechnology
  • O14 Industrialization; Manufacturing and Service Industries; Choice of Technology