Entry and price competition in the over-the-counter drug market after deregulation

Abstract

In the last two decades, many European countries allowed the sale of over-the-counter (OTC) drugs outside pharmacies. This was expected to lower retail prices through increased competition. Evidence of such price reductions is scarce. We assess the impact of supermarket and outlet entry in the OTC drug market on OTC prices charged by incumbent pharmacies using a difference-in-differences strategy. We use price data on five popular OTC drugs for all retailers located in Lisbon for three distinct points in time (2006, 2010, and 2015). Our results suggest that competitive pressure in the market is mainly exerted by supermarkets, which charge, on average, 20% lower prices than pharmacies. The entry of a supermarket among the main competitors of an incumbent pharmacy is associated with an average 4% to 6% decrease in prices relative to the control group. These price reductions are long-lasting but fairly localized. We find no evidence of price reductions following OTC outlet entry. Additional results from a reduced-form entry model and a propensity score matching difference-in-differences approach support the view that these effects are causal.