Competition in the over-the-counter drug market after deregulation: evidence from Portugal

In 2005, Portugal allowed over-the-counter (OTC) drugs to be sold outside pharmacies, namely in supermarkets and outlets (parafarmácias). The rationale for OTC market liberalization was simple: the entry of new retailers, combined with free pricing, would lower OTC prices via increased competition. This paper examines whether the entry of new, non-pharmacy OTC retailers triggered price reductions by incumbent pharmacies.

The analysis uses data on the prices of five popular OTC drugs at all retailers located in Lisbon, for periods after OTC market liberalization. The empirical analysis compares OTC prices in pharmacies that experience the entry of a non-pharmacy OTC retailer in their proximity and in pharmacies that do not, before and after entry occurs.

There are three main results. First, supermarkets charge 20% lower prices than pharmacies. This might be due to economies of scale in their distribution chain and to a stronger bargaining position when negotiating with wholesalers. Outlets, in turn, charge prices similar to pharmacies. Second, while pharmacies lower their prices by about 5% following the entry of a supermarket in their proximity, they do not lower their prices following the entry of an outlet. This suggests that the ability of entrants to exert competitive pressure on incumbent pharmacies is crucial for OTC market liberalization reforms to lower OTC prices. Third, the price reductions following the entry of a supermarket are long-lasting, but fairly localized.

While OTC market liberalization reforms similar to the Portuguese one were implemented in many European countries in the last 20 years, evidence on their price impact is scarce. This paper shows that such reforms can be successful at fostering competition and lowering prices charged by pharmacies, contributing to a deeper understanding of how competition takes place in retail OTC markets.

Click here to go to the paper by Ana Moura and Pedro Pita Barros.