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School of Economics and Finance

No. 951: The Economics of the Public Option: Evidence from Local Pharmaceutical Markets

Juan Pablo Atal , University of Pennsylvania
Jose Ignacio Cuesta , Stanford University and NBER
Felipe Gonzalez , Queen Mary University of London
Cristobal Otero , University of California Berkeley

June 21, 2023

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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.

J.E.L classification codes: JEL D72, H4, I16, L3

Keywords:

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