Quality Regulation and Competition: Evidence from Pharmaceutical Markets

We study the effects of quality regulation on market outcomes by exploiting the staggered phase-in of bioequivalence requirements for generic drugs in Chile. We estimate that the number of drug products in the market decreased by 25%, average price paid increased by 10%, and total sales decreased by 20%. These adverse effects were mostly concentrated among small markets. Our results suggest that the intended effects of increasing competition through increased (perceived) quality of generics---and thus reduced vertical differentiation---were overturned by adverse competitive effects arising from the costs of complying with the regulation.